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A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013

A MAnIfesto for tHe creAtIve econoMy

Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013

A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013
A MAnIfesto for tHe creAtIve econoMy Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia April 2013

About nesta

Nesta is the UK’s innovation foundation. An independent charity, we help people and organisations bring great ideas to life. We do this by providing investments and grants and mobilising research, networks and skills.

Nesta Operating Company is a registered charity in England and Wales with company number 7706036 and charity number 1144091. Registered as a charity in Scotland number SCO42833. Registered office: 1 Plough Place, London, EC4A 1DE.

www.nesta.org.uk

© nesta 2013.

A MAnIfesto for tHe creAtIve econoMy

About the authors

A Manifesto for the Creative Economy is the work of Hasan Bakhshi, Ian Hargreaves and Juan Mateos-Garcia.

Hasan Bakhshi is Director, Creative Economy in Nesta’s Policy & Research Unit and Research Fellow at the Queensland University of Technology. He has led Nesta’s creative economy policy and research work for the past six years. His recent work has included the Next Gen report with Ian Livingstone, Alex Hope and Juan Mateos-Garcia and the design and oversight of the Digital R&D Funds for the Arts. His earlier work at Nesta included co- authoring the Staying Ahead report with Will Hutton and Philippe Schneider.

Ian Hargreaves was a Nesta Research Fellow in 2012/13. He is Professor of Digital Economy at Cardiff University and author of Digital Opportunity, A Review of Intellectual Property and Growth, commissioned by the UK Government and published in 2011. In 2009, the Welsh Government commissioned him to lead a review of the creative industries in Wales which led in 2010 to the publication of The Heart of Digital Wales: a review of creative industries. Most of Ian’s career has been spent in journalism: he was Deputy Editor of the FT; Editor of the Independent; Editor of the New Statesman and Director of BBC News and Current Affairs.

Juan Mateos-Garcia is Creative Industries Research Fellow at Nesta and CENTRIM at the University of Brighton. His recent work has included the Next Gen report with Ian Livingstone, Alex Hope and Hasan Bakhshi, and the Creative Clusters and Innovation report with Caroline Chapain, Lisa de Propris, Stewart MacNeill, and Phil Cooke. He is currently working on the Brighton Fuse study of the Brighton Creative and Digital cluster funded by the Arts and Humanities Research Council.

Acknowledgements

We are grateful to the following individuals, who contributed encouragement, ideas, challenge and valuable disagreement: Lynne Brindley, Diane Coyle, Stuart Cunningham, Robin Foster, Andrew Gowers, John Hartley, Michael Keane, Jon Kingsbury, Charles Leadbeater, Brian McLaren, Geoff Mulgan, John Newbigin, Kate O’Connor, Mark Oliver, Mark Pearson, Rick Rylance, Nick Starr, Ed Steinmueller, Emily Thomas, Bill Thompson, Neil Watson and Stian Westlake.

We are also grateful to Alan Freeman and Peter Higgs, co-authors with Hasan of A Dynamic Mapping of the UK’s Creative Industries on which Chapter Three of this manifesto heavily draws, to Jon Watts and Stephen Adshead for their work on the Assessment of Market and Technology Trends, and to Mark Spilsbury for his assistance in producing the GVA estimates. Carlos Gutierrez provided research assistance.

contents

foreword

6

suMMAry

7

1 wHy tHIs MAnIfesto? wHy now?

10

2 How creAtIve BrItAIn lost Its wAy

17

3 wHAt Is tHe creAtIve econoMy?

26

4 creAtIve tecHnoloGIes And MArkets

35

5 A polIcy AGendA for tHe creAtIve econoMy

43

6 reseArcH And developMent

51

7 Access to fInAnce

63

8 Arts And culture

71

9 coMpetItIon

79

10 copyrIGHt wArs

90

11 skIlls And educAtIon

96

12 A MAnIfesto for tHe creAtIve econoMy

107

endnotes

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A MANIFESTO FOR THE CREATIVE ECONOMy FOREWORD

foreword

These are exciting times for anyone in the creative economy. While much of the rest of the economy appears becalmed, it’s continuing to experience a heady mix of dynamic growth, a proliferation of new business models, as well as stunning new technologies that are making culture even more intense and engaging.

At Nesta, we’re fascinated to see what happens next. Our interest derives partly from our practical work – which stretches from digital arts to games, mentoring to media. It also derives from our research, much of which aims to bring greater clarity and rigour to understanding the dynamics of these industries, part of a broader programme of work we’ve been doing on how policy can support innovation, and how, through what we call Plan I, the UK can follow a strategy for innovation-led growth.

This manifesto shows very clearly both what’s possible – and what could go wrong. It sets out both analysis and prescription, and our hope is that people will engage seriously with both.

For several decades there has been much talk about digital technologies, about convergence, and about the transformation of old art forms, from the book to the film. Some of the rhetoric was overheated, and some of the predictions were slow to materialise. That led many to make the opposite mistake of concluding that because the revolution didn’t materialise immediately, it had been postponed indefinitely.

Instead, as this report shows, the digital revolution is now very much underway, and almost certainly accelerating. This has obvious implications for the UK, given the remarkable scale of the creative economy. It demands a radical rethink of policies far beyond the traditional boundaries of the arts, encompassing everything from schools to competition policy.

But I hope the analysis set out here will also be of interest in many other parts of the world which also want to make more of a living out of creativity. A previous generation of ideas and policies – many of which spread across the world over the last two decades – has run its course. It’s now time for a refresh. This manifesto shows how.

Geoff Mulgan Chief Executive of Nesta

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A MANIFESTO FOR THE CREATIVE ECONOMy SUMMARy

suMMAry

The UK’s creative economy is one of its great national strengths, historically deeply rooted and accounting for around one–tenth of the whole economy. It provides jobs for 2.5 million people, more than in financial services, advanced manufacturing or construction. This creative workforce has in recent years grown four times faster than the workforce as a whole.

Behind this success, however, lies much disruption and business uncertainty, associated with digital technologies. Previously profitable business models have been swept away, young companies from outside the UK have dominated new Internet markets, and some UK creative businesses have struggled to compete.

UK policymakers too have failed to keep pace with developments in North America and parts of Asia. But it is not too late to refresh tired policies. As the web’s inventor, Sir Tim Berners–Lee puts it: “the Web as I envisaged it, we have not seen it yet. The future is still so much bigger than the past”. On many fronts, technology continues to evolve rapidly and radically, guaranteeing further disturbances to established players and opportunities for innovators. Big Data, the Internet of Things, Wearable Computers, Assisted Creativity and the Maker Movement provide examples of this continued dynamic.

This manifesto sets out ten areas in which policy refreshment is urgent. The top priorities are:

To ensure that the next generation of the Internet is truly open. This calls for contestable creative economy markets, well supervised by competition authorities which have the information and authority to act speedily and effectively when there are concerns about market abuse.

All teenagers should have the opportunity to learn creative digital skills, such as designing apps and games, as part of a fusion in the curriculum covering technology and art, as well as maths, science and the humanities.

Policy tools designed to incentivise innovation, from tax relief to procurement rules, should be adapted to the needs of the creative economy.

The UK’s publicly funded creative powerhouses, from the BBC to universities, arts organisations and museums, should make the most of the next generation of digital technologies.

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A MANIFESTO FOR THE CREATIVE ECONOMy SUMMARy

our ten policy recommendations are, in full:

proposAl one

the Government should adopt our proposed new definitions of the creative industries and the wider creative economy. these are simple, robust and recognise the central role of digital technologies.

proposAl two

policymakers should establish a ‘creative innovation system’ framework within which strategic priorities can be addressed in a coherent and effective manner.

proposAl tHree

the Government should make r&d tax relief more accessible to creative businesses. technology strategy Board programmes should be further broadened to address the needs of the creative economy. public procurement rules should be changed to open up opportunities for smaller digital firms. cross–disciplinary research council knowledge exchange initiatives should be rigorously evaluated and the lessons applied in a further round of investment. More international collaborations with leading research centres should be encouraged.

proposAl four

local policymakers should observe our seven–point guide for developing creative clusters.

proposAl fIve

Government should ensure that its generic business finance schemes do not discriminate against creative businesses, and that regulations help the development of financial Internet platforms (such as crowdfunding sites). Absent hard evidence on their efficacy, government should resist introducing new sector–specific finance programmes. A higher priority is to coordinate the collection and publication of investor–friendly data through the creative Industries council, thus supporting the development of a thicker market for risk finance.

proposAl sIx

the treasury and the dcMs should undertake a broad–based assessment of the value of public arts and cultural spending in the uk, drawing upon similar work on the natural environment and the cultural value project of the Arts and Humanities research council. funding decisions should be justified in the light of criteria that emerge from this work.

9 A MANIFESTO FOR THE CREATIVE ECONOMy SUMMARy

proposAl seven funders should incentivise experimentation with digital technologies by arts and cultural organisations

proposAl seven

funders should incentivise experimentation with digital technologies by arts and cultural organisations and allocate a sustained percentage of their resources to digital r&d, ensuring that the evidence arising from this work is openly shared. under its new leadership, the BBc should publish in 2013 a strategy to reflect its digital public purpose in the period to 2018, not least through the ambitious vehicle of its digital public space initiative.

proposAl eIGHt

ofcom should be given powers to gather information in all Internet markets in order to maximise the chances of sound and timely judgments about the emergence of potentially abusive market power and other market concerns (an ‘early warning system’). ofcom should contribute a regularly updated strategic overview of these issues, working closely with the Information commissioner’s office, the Intellectual property office, the competition and Markets Authority and other relevant agencies. ofcom’s remit should be broadened to advise the Government on the actions needed to ensure the uk enjoys a flourishing, open Internet, balancing the interests of consumers and citizens and committed to supporting innovation and growth. these changes should be a central feature in any communications Bill planned for 2013/14.

proposAl nIne

uk copyright rules and exceptions should be re–balanced, along the lines proposed by the uk Government, and also at the european level as part of the drive for a european digital single Market. A new mechanism for enabling vastly increased and more efficient rights licensing transactions (through the proposed copyright Hub) should be further developed during 2013, again with potential european replication.

proposAl ten

Governments across the uk should make a schools digital pledge, designed to ensure that the school curriculum, including its representation in the english Baccalaureate, brings together art, design, technology and computer science and that young people are able to enjoy greater opportunities to work creatively with technologies, both in and out of school. steps should also be taken to address the disconnect between what uk creative businesses need from graduates and what universities are teaching them. Measures to improve the quality of graduate employment data made available to prospective applicants for creative courses (including industry–approved course kitemarks) should be extended.

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1 wHy tHIs MAnIfesto? wHy now?

The goal of this manifesto is to identify what policymakers, educators, businesses and regulators need to do to ensure that the UK’s creative economy thrives in the coming decade. This important part of the UK’s economy has a considerable record of success. According to our new definitions and estimates, the creative economy employs 2.5 million people (greater than financial services, advanced manufacturing and construction) and accounts for at least 9.7 per cent of the UK’s Gross Value Added.

This success reflects an outstanding tradition in creative content, and a wealth of talent in Britain’s creative people and entrepreneurs, underpinned by natural advantages such as the global reach of the English language. It also reflects supportive public policies, including a long–established commitment to the arts and cultural sector and a well–resourced and adaptive model of public service broadcasting. Policymakers in the UK cottoned on early to the contribution that the creative industries make to the economy, and their interest has been widely studied and copied around the world.

We believe, however, that this success is now at risk. The ubiquitous digital communications technologies which have emerged in the last 15 to 20 years present an epochal challenge to the business models of the UK’s creative businesses threatening to make obsolete the policies and institutions that have been vital to past success. The reaction of policymakers and creative businesses to these disruptive shifts has so far been uncertain.

This uncertainty of response has been most striking in the UK’s resistance to the necessary adaptation of copyright law to digital realities. But it extends more broadly into the design of policies to support R&D; to how the creative economy is taxed and how it is financed; to the response of the subsidised arts and cultural sector to digital technologies; to the regulation of competition; and to the design of the school curriculum.

The prevailing rhetoric of this debate, amplified by the campaigns of lobbyists on all sides, has often put technology companies and creative businesses at loggerheads with each other, when instead the situation calls for well supervised, contestable markets that respond to changed circumstances and facilitate innovation. In this manifesto, we argue that this conflict creates a drag on our creative industries and, increasingly, upon the wider creative economy. Given the unusually high importance of these sectors to UK jobs and prosperity, this is not a price the UK can afford to pay.

The creative economy is one of the few industrial areas where the UK has a credible claim to be world–leading. This leadership position cannot be taken for granted, as we know from such positions lost in the automotive industry in the 1960s, 1 computing in the post– war period 2 and the chemicals industry in the third quarter of the 19 th century. 3 In all these cases, a more accurate assessment of strengths and weaknesses and a more systematic response might have increased the chances of a better outcome. We set out, therefore, a new policy agenda to sustain the UK’s creative economy in the next decade, based on a more constructive relationship between technology companies and creative businesses, and on grounded definitions and data revised for the digital era.

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1. the new industrial revolution

The rapid diffusion of information and communication technologies, most prominently the Internet, is transforming modern economies and societies, threatening some established creative businesses, such as newspapers, and massively disrupting others, like those in the recorded music industry. 4,5 Meanwhile, the biggest winners are digital, American companies focused upon either distribution or devices: Google, Facebook, Amazon and Apple.

you could say this pitch for a UK creative economy policy refresh comes too late, as the Internet is already approaching its third decade of global disruption, but that would not be right. The ICT revolution is not yet half done. 6 As the web’s inventor, Sir Tim Berners–Lee puts it, “the Web as I envisaged it, we have not seen it yet. The future is still so much bigger than the past.” 7

In these circumstances, the UK’s creative economy has as good a chance as almost any country’s of doing well. Its strengths include: a long track record of creative excellence backed by public funding; a decent tradition of technology creation; diverse and dynamic cities housing world–class cultural institutions (most obviously, but not only, London); a public that is amongst the world’s most sophisticated in its use of digital technology; strong, long–established and diverse corporate players in digital, such as BSkyB, WPP, the Open University and Pearson, and a start–up ecosystem ranked top in Europe (though seventh in the world) according to Startup Genome. 8 What we do not have is a policy stance towards the creative economy which is truly fit for this stage in the digital era.

This matters because the Internet stakes are so high. The Boston Consulting Group thinks that the Internet Economy of the G–20 group of countries will be worth $4.2 trillion in 2016. 9 Booz claims that ‘universal digitisation’ would have been worth an additional £63 billion to UK GDP in 2011. 10 McKinsey says that the Internet contributed a tenth of all economic growth in the G–8 countries over the 15 years to 2009. 11 Copenhagen Economics says the completion of Europe’s Digital Single Market is as economically significant today as the achievement of the original EU single market, which underpinned the continent’s prosperity for a generation. 12

The ultra–rapid speed of Internet–enabled smart phones, and the growth of innovative broadband providers like B4RN is circumventing the slowness of incumbent telecommunications firms in rolling out ‘fibre in the ground’, and forcing them to offer competitive products. In emerging markets, mobile phones not computers are the gateway into the Internet. In Europe and North America, those who suffer ‘digital exclusion’, usually meaning lack of regular access to the Internet, remain significant though in a diminishing minority: roughly 20 per cent of the population. 13 Although there are ‘dark sides’ to the Internet – including fears about loss of privacy, cyber security, illicit file sharing and uncontrolled access to undesirable content – most governments have concluded that they need to design policy to encourage the benign effects of the Internet upon innovation and economic growth, whilst mitigating the risks.

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So, even in tough economic times, political leaders show willingness to invest in broadband infrastructure because of the high returns on offer. 14 The average impact of broadband on annual GDP growth in the Euro–15 countries between 2002 and 2007 has been estimated at 0.6 per cent, accounting for almost 17 per cent of total growth over this period. 15 A ten percentage point increase in broadband penetration between 1999 and 2007 is judged to have raised annual per capita growth between 0.9 and 1.5 per cent in OECD countries. 16

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What makes new information and communications technologies so economically powerful? The answer is that their impacts are felt everywhere. Their pervasiveness is why economists consider them one of a small number of ‘general purpose technologies’ – like steam power and electricity – that change entire economic growth trajectories in industries that use them. 17 The Internet, one such information and communications technology, has created unprecedented opportunities for more distributed forms of organisation and open collaboration throughout the economy in areas as wide as retailing (eBay), software (GNU/Linux), travel (TripAdvisor), finance (Kickstarter), and manufacturing (the Maker Movement). 18, 19

But a successful digital economy requires much more than investment in broadband pipes:

it also calls for investment in new skills, the re–engineering of production processes and new business models to create and capture value. We see this in play on many fronts: the existence of widespread computer programming skills shortages in the UK workforce; 20 the trend towards outsourcing corporate functions in industries like banking and retail; the global reconfiguring of logistics chains (the Post Office) and the hollowing out of British high streets (Jessops, HMV) while e–commerce booms.

Beyond the realm of economics, the Internet’s disruption to social patterns is equally extensive; visible in how we stay in touch with friends and family, participate in communities of place and interest, and mobilise politically. Here too, cherished norms of behaviour are challenged, as new opportunities unfold.

We know how far–reaching the economic transformations wrought by disruptive technologies can be. Japan’s once mighty consumer electronics industry sector is a current example: profitability has crashed, competitive edge has been lost. 21 Britain invented synthetic dye and modern steelmaking in the 1850s, but by 1900 had yielded its early lead in the chemicals and steel industries to Germany and the US. 22

2. Impact on the creative economy

Today, the creative industries operate in a technology landscape changed beyond recognition since 1998 when the Department for Culture, Media and Sport (DCMS) first grouped together 13 business sectors whose connections had hitherto not been recognised by policy.

The average user in the UK spends almost a full day of each month online, 23 and the advertisers who traditionally financed news and entertainment production have followed her there: in 2009, the UK was the first country in the world where Internet advertising overtook advertising in other media, reaching £4.8 billion in 2011. 24 Almost six in ten own smart phones (second only to Spain) and the UK leads the world in digital radio and digital video recorder ownership too. Almost a quarter of UK Internet users claim to access TV online every week, higher than any other country except China (where broadband penetration is, however, much lower). 25 One of the world’s biggest companies by market capitalisation, Apple, makes market–leading gadgets, but is also a leader in distributing digital creative content. The second and third most popular websites in the UK – Facebook and youTube (after Google Search) – help their users share and navigate this content. 26

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In some cases, the rise of digital has been accompanied by a severe decline in analogue formats. This is strikingly the case in news, where, in the UK, all the main newspapers have suffered big reductions in print circulation and many smaller titles have disappeared entirely. In music, sales of physical formats such as CDs and vinyl have for the first time been overtaken by digital revenues. 27 In film, the disruption is visible in the demise of bricks and mortar rental outfits and in mail–order DVD rental, which is now forced to compete, in the UK, with video–on–demand services from the likes of Netflix UK, Lovefilm, Blinkbox and BSkyB’s Now TV.

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That this digital ‘gale of creative destruction’ 28 has struck the creative industries particularly hard is not surprising – many creative businesses produce and sell information goods that can be easily manipulated, distributed and stored using information and communication technologies. With some obvious exceptions, such as designer fashion, creative goods are easy to codify into bits. Digital technologies also give firms greater opportunities to target their products and services to consumers, a boon for innovative creative producers wanting to tap the public’s desire for personalised experiences. They also afford artists new ways of expressing their personal visions, of differentiating their work from others, often through new, multi–media and multi–platform approaches.

New technologies have also changed the way we consume, share and talk about creative content via Internet social media platforms such as Facebook. Music and other live performance arts are regularly streamed on platforms like The Guardian Online and broadcast to digital cinemas and even museums and art galleries are following suit. The social circles in which we discuss and share ideas, and through which we discover news, media and cultural content, have greatly expanded and yet become more connected. 29

At the same time, the boundaries between creative supply and demand have blurred, with the Internet now emerging as a mass–empowerment device for connecting individuals and businesses to a vast, global toolkit and repository of knowledge (Wikipedia, Khan Academy and, more recently, Massive Online Open Courses (MOOCs)). Users, hobbyists and amateurs, who only a few years ago would have been passive consumers, nowadays upload one hour of video content to youTube every second. In the UK, the popularity of youTube explains why the average time spent on video–sharing sites increased by 43 per cent in the year to March 2012. 30 In the US, the mobile usage of photo–sharing app Instagram overtook Twitter in August 2012. 31 Crowdsourcing platforms such as OpenStreetMap, TopCoder and Kaggle show different ways in which the Internet democratises the domain of expertise and creativity. Objects with Internet connections (the ‘Internet of Things’), along with emerging technologies such as 3D printing, promise to transform craft and manufacturing. 32

3. Innovation and growth in the uk’s creative economy

This torrent of change presents UK creative businesses with a bewildering array of innovation opportunities, sometimes obscured by a blizzard of threats to existing business models. Digitisation lowers most costs of production and of reaching new markets – including in emerging economies – where increasingly affluent and connected audiences demand more creative goods and services. 33 It has generated entirely new media forms, such as online video games. It creates untold opportunities for preserving and providing greater access to the UK’s cultural heritage. Digital distribution channels, in theory at least, reduce the UK’s reliance on global ‘gatekeepers’ for the financing and marketing of creative productions, a problem for UK creative firms traditionally better at creating value than at capturing it. 34 This suggests that the Internet could help UK creative businesses overcome the traditional constraints on their scalability. As the UK economy struggles to grow out of its second dip into recession – with the worst five–year growth rate in peacetime since the 1920s 35 – it is more important than ever to ensure that the UK’s creative industries are able to exploit all of these new growth opportunities. The Government has acknowledged this by including them in its Plan for Growth. 36

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In this manifesto, we seek to define a clear framework for policy, based on a simplified definition of the creative industries as “those sectors which specialise in the use of creative talent for commercial purposes.” 37 But the creativity which drives these industries is also critical for many other parts of the economy. 38 This arises from growing pressure to differentiate products and services from international competitors, deploying aesthetic and symbolic expressions of quality (such as design, brand and cultural association) 39 which appear to be increasingly important to consumers and businesses. This is what we

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and others mean by the creative economy, whose activities we define more generally as involving “the use of creative talent for commercial purposes.”

The creative industries have a central position in this creative economy, because they specialise in creative activities, but also because they supply other sectors with creative inputs that increase innovation and productivity. 40 The past decade has seen businesses across the UK economy significantly increase their investments in creative intangible assets like design, software and advertising: between them, these categories accounted for over 40 per cent of overall investment in intangibles in 2009, compared with R&D which accounted for just 13 per cent. 41

In these circumstances, we might have expected the historical strengths of the UK’s creative industries to support a comfortable, even triumphant transition to digital markets and business models. But this has not been so: newer and smaller creative businesses in particular express their frustration with policies with regard to the issues addressed in this manifesto: education (visual effects), access to finance (music), intellectual property (archives), competition (book publishers) and infrastructure (video games).

Others’ frustrations are also surely explained in part by the well–known ‘Innovator’s Dilemma,’ 42 which shows that past success generates inertias that obstruct adaptation to the new. In the music, film and now book publishing industries worldwide, some established players have resisted the adoption of new technologies where these could jeopardise established revenue streams or they have sought to retain or establish rules for accessing digital content via new technologies (such as release windows and encryption) which have often not made sense to consumers, who are increasingly accustomed to instant online purchase and wide open international transactions. Music is an often cited example, which tried to constrain the emergence of first recording and then a wave of copying technologies, culminating in digital distribution on the Internet, with its associated problems of rights piracy. 43

The fear of cannibalising established revenue streams, while sometimes well founded, 44 can undermine willingness to experiment with new business models. In the policy arena, incumbents’ resistance to change also encourages attempts at regulatory capture, most evident in policymakers’ traditional hostility to flexibility in the Intellectual Property Regime, which is needed to reflect changing consumer expectations and practices and to prevent copyright from creating barriers to innovation in other parts of the economy, such as medical and other scientific research. 45

This conservatism, we argue, is one of the reasons why UK policymakers have struggled to respond coherently or sufficiently to the transformations produced by information and communications technologies and the Internet: unclear whether the policy priority is the Creative Industries (Creative Britain, 2008), 46 the Creative Economy (Cox Review, 2005) 47 or the Digital Economy (Digital Britain, 2009). 48 There has, over time, been too ambivalent an attitude towards business–facing creative sectors like software, design and advertising and an unwillingness to adapt mainstream innovation and growth incentives, such as the R&D tax credit, to the needs of high–tech creative industries. 49 It is also reflected in a public debate which pits the American born–digital content distributors (especially Google and Amazon) as the enemy of UK creative industries when the truth is that the fortunes of these businesses are inextricably intertwined.

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Meanwhile, the UK has an education system which promotes STEM (Science, Technology, Engineering, and Maths), not a multi–disciplinary mix of STEAM, 50 skills, and which up until now has gravely neglected the extensive demand within the changing creative economy for computer programming skills. On the whole, politicians and policymakers in the UK often appear insecure about whether to embrace the Internet (with its prospect of enhanced innovation and growth) or to recoil from it (illicit file sharing, loss of privacy and domination by American business giants).

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In recent years, the confusion arising from this ambiguity has become more marked

and more damaging. It is visible in the DCMS’s decision in 2011 to drop software from its classification of the creative industries, and in its lack of remit to frame policy with a view to stimulating the wider creative economy. 51 It is there in the chaotic nature of the debate about the education and skills needs of the UK’s creative economy, which has yielded an English Baccalaureate which will (following pressure) include computer science but which excludes art and design & technology; and which struggles on many fronts to respond to the scale of inter–disciplinarity demanded in the digital age. It has made us too cautious about empowering our communications regulator, Ofcom to evaluate incipient competition issues in fast–changing digital markets. And it is most striking of all in the acrimonious arguments about copyright between rights holders and technology companies, where UK governments have, traditionally, taken a highly defensive stance, making choices such as a succession of term extensions that disregard hard economic evidence. 52

This pattern of behaviour, we believe, weakens both the capacities and incentives of UK businesses to innovate and so threatens the future contribution of the UK’s creative economy. When we look at its digital capabilities, while there are the clear strengths that we have noted, there are critical areas where they are lacking. For example, there are no UK companies in the current crop of dominant Internet platforms that are today capturing so much economic value in the creative economy. Few UK content businesses have so far been able to fulfil the promise of the ‘long tail’ and build global digital distribution operations while retaining their independence. The UK has been unable to exploit its world–renowned archives of English language content, despite the admired strength of its cultural institutions, such the BBC and the British Library. And even in areas like video games, where the UK took an early lead in the creative economy, this too has slipped.

4. our manifesto

In short, the UK’s creative economy remains richly creative, but it faces an innovation

problem. Or to put it another way, the UK’s creative businesses risk failing to make the most of their underlying creativity if they are unable to adapt their business practices and structures to the possibilities and constraints of new technologies. What can be done?

The starting point is to ensure that the UK offers an environment to spur the kind of innovation UK creative businesses need to undertake. The Government’s job is to set the right framework for growth. This includes contestable creative markets where transactions costs are low and the rewards to innovation are high. To enable this there must be a refreshed regulatory regime, which includes improved arrangements for intellectual property. The competition authorities, currently undergoing a major re–shape in the UK, have to be empowered to play a more effective and agile role.

Government must do what it is able to do to ensure that the UK’s most innovative businesses – including the start–ups where the most disruptive innovations will come from – have access to the risk capital they need to experiment and grow. Careful consideration must also be given to where public investments through institutions like the BBC, the Technology Strategy Board and higher education institutions such as the Open University can support the development of UK–based global Internet platforms. Given the strength of its creative content and service businesses, the UK should also push for open and accessible platforms where the risks of market abuse by gatekeepers are lower. 53

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A front–rank creative economy must also have front–rank broadband infrastructure, an

argument which has been well rehearsed elsewhere, 54 so we do not discuss it in detail in this manifesto, but it forms an important element in our view of what is needed. We also need to work harder at understanding and maximising the leverage that exists between the UK’s strong publicly funded arts and cultural sector and the creative economy and the role that digital technologies can play in this. 55

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Cluster development policies in the devolved and regional economies must be prioritised on growing industrial clusters that fuse creativity and digital technologies. 56 The Government also needs to invest in the skills and talent of the creative people on whom the sector depends, investing not just in STEM knowledge but in art, design & technology.

In this manifesto, we set out ten clear recommendations which, if acted on, will substantially improve the innovation and growth prospects of the UK’s creative economy. These recommendations cover a range of themes, some of which are the responsibility of the UK Government, while others are the responsibility of the devolved administrations in Scotland, Wales and Northern Ireland. The policy principles that we identify are applicable across the whole of the UK, but the specific ways in which these principles might be embraced may differ in the devolved nations, particularly where differences in policy and practice already exist. Where possible, we have sought to reflect these nuances.

The independence referendum planned for Scotland in 2014 may bring major constitutional change to that part of the UK, raising a multitude of policy questions for the creative industries across areas such as broadcasting, communications, fiscal policy and competition policy. While there is an urgent need for informed debate on these questions, this manifesto is not the place for that. We do not aim to cover every issue in detail, but to establish the right direction for policy in every part of the UK. It is also the case that many of the ideas promoted in this manifesto are as relevant for the whole of the European Union as for the UK; not least because UK law in areas such as communications, broadcasting, competition and intellectual property is framed at the European level. We take a number of opportunities to show where our proposals potentially extend to this pan–European context, though we acknowledge the potential impact of the current political debate about the UK’s relationship with the European Union upon these matters.

If the course we recommend is followed, the UK will be able to exploit more effectively the opportunities that digital technologies and the Internet afford. That way, the UK’s creative content and service businesses will be well placed to compete in global digital markets where we will see continued rapid growth. The stark alternative is a relative loss of competitive position.

If we respond vigorously to this challenge, the UK should increase its global market share:

building new markets in Asia and the Americas and fending off competition globally from their lower cost exporters. It may even help make the UK a possible home to whatever small legion of new enterprises snaps at the heels of currently dominant Internet platforms like Google, Apple, Amazon and Facebook in the course of the next decade. Perhaps more important, it will ensure that one of the few sectors of the economy where the UK has a leading position internationally will continue to thrive, creating more high–quality jobs and making greater contributions to economic value added.

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2 How creAtIve BrItAIn lost Its wAy

1. Creative Britain

In the late 1990s, the UK pioneered 57 an approach to supporting its creative industries. Although viewed by critics to the left of the Blair Government as yet another example of the forward march of neo–liberal marketisation and by others as involving more rhetoric (‘Cool Britannia’) than substance, the ‘Creative Britain’ narrative generated a policy paradigm which has been studied if not copied all over the world 58 and which has been characterised as a highly effective ‘policy brand’. 59 The simple power of the ‘creative island’ story was re–illustrated in Danny Boyle’s acclaimed opening ceremony for the 2012 London Olympic Games.

This chapter considers the history of the Creative Britain project, from its political inception in 1997 to the present day, primarily with a view to identifying those risks to its further success which have emerged in recent years. We highlight points worth noting, whether these be visionary (the value of bold and motivational leadership) or cautionary (the risk of regulatory capture or incoherent policy). Without a grasp of this history, policymakers risk repeating its errors.

The 1998 Creative Britain book (in structure, an edited collection of speeches by the then Secretary of State for Culture, Media and Sport, Chris Smith) began with a visionary quotation from William Blake and continued:

“This book is about creativity. It is about the cultural ferment and imaginative heights to which creativity leads, the enormous impact that both creativity and culture have on society and the growing importance to the modern economy of Britain of all those activities and industries that spring from the creative impulse. And it is about the implications of all these things for the development of public policy, and the work of government.” 60

From this, it was clear that the project had aspirations well beyond the obvious core territory of the arts and media, extending into design and even science, medicine and engineering; it spoke to the role of creativity throughout an emerging ‘post–industrial’ UK creative economy, more dependent upon knowledge than natural resources or manufacturing skills, and set in a rapidly globalising context. 61 Box 2.1 reproduces the book’s Contents page.

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In parallel, however, Creative Britain also initiated a more workaday ‘mapping’ of creative industries, defined as comprising 13 creative content sub–sectors, alphabetically:

advertising, architecture, art and antiques, computer games, crafts, design, designer fashion, film, music, performing arts, publishing, software and television and radio.

It would be the role of the Government to ensure that these sectors were treated seriously as contributors to the national economy as well as essential to the fabric of the UK’s cultural life. From the start the mapping exercise acknowledged that “there was no historical, and little current, data available” 62 to support this exercise.

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This early tension between high–level statements of vision and problematic quantification of facts has persisted to the present day. In Chapter Three of this manifesto we set out new thinking on data and boundary definitions designed to support a more coherent approach to policy development; in this chapter, we follow the flow of events.

The 1997 manifesto pointed to a bundle of inspirations and motivations for Creative Britain:

A political narrative of ‘modernisation’, reflected in Tony Blair’s re–naming of his party as ‘New Labour’, committed to a modernised UK economy equal to the demands and opportunities of globalisation. The Department of Heritage was re–branded as the Department for Culture, Media and Sport and invited to collaborate closely with the Department of Trade and Industry (DTI), which would itself be subject to a number of re–badgings in the subsequent 15 years. 63

The legacy values of Victorian and Edwardian social and communitarian philosophy, in particular the ideas of William Morris and John Ruskin (‘useful beauty’) along with Keynes’s forthright advocacy for an Arts Council. This provided a policy context for restoring free entry to museums and galleries; along with the diversion of funds from the National Lottery, established in 1994, to create the National Endowment for Science, Technology and the Arts, which Chris Smith said (presciently) would be “about pulling down the artificial barriers between science, technology and the arts, because in the worlds of the new design techniques and multimedia and digitised images such barriers are becoming meaningless as well as counter–productive.” 64

A recognition that rapidly emerging digital communications technologies called for substantial infrastructure investment, along with radically re–designed regulation. In December 2003, Ofcom took the place of five regulators in broadcasting, telecommunications and radio spectrum. Answerable jointly to the DCMS and the DTI, Ofcom’s focus would be broadcasting and telecommunications, rather than the Creative Britain project as a whole, though the overlap between Ofcom’s mission and the pursuit of Creative Britain would become more obvious in the early years of the new millennium as digital communications technologies became pervasive.

Box 2.1: contents page for Creative Britain, 1998

1. Cultural Value: the Creative Industries in Britain.

2. Only Connect: Culture and our Sense of Identity.

3. A Vision for the Arts.

4. All the World’s a Stage: Culture, Business and Society.

5. The World is your Oyster: the Information Society and the Role of Public Libraries.

6. Past Present: the importance of World Heritage.

7. In a Great Tradition: The British Music Industry.

8. Making Movies: the State of the UK Film Industry.

9. Pennies from Heaven: Public Broadcasting in the Digital Age.

10. Living in the Real World: Access to Intellectual Property.

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11. Design: At the Crossroads of Science and Arts.

12. It Could be you: The Future of the National Lottery.

13. Into the Future: The Millennium and Beyond.

14. Arts and the Man: Culture, Creativity and Social Regeneration.

15. No Wealth but Life: the Importance of Creativity.

2. what about the Internet?

The importance of new communications technologies in the Creative Britain concept was clear from the outset, revealing continuities with earlier paradigms of productivity–fuelled economic regeneration enabled by computers and other electronic devices. 65 From a critical perspective, this modernising fusion of culture and electronics was seen as an “attempt to capture the current prestige of this theory of innovation… for a sector and a group of workers to whom it does not really apply.” 66

By 1997, the threat to the broadcasting barons of multi–channel television delivered by new mechanisms, such as cable and satellite, was clear, as was the commitment of liberalising governments around the world to the privatisation of the telecommunications sector. Much less clear, in the pages of Creative Britain, was the significance in this unfolding drama of the Internet. Despite clunky dial–up connectivity, there was by March 2000 enough heat to inflate the ‘dotcom bubble’. yet, Creative Britain’s chapter on the music industry does not mention the Internet, noting that “the toughest challenge facing the music industry is CD piracy,” said to be costing globally $5 billion a year in lost physical sales. Lord Smith commended the UK music industry’s response to off–line piracy as a “blue–print for anti–piracy initiatives in other creative industries.” 67 In 1998, peer–to–peer file–sharing was already a fast growing phenomenon and 1999 saw the launch of Napster, which precipitated a response from the American and British music industries which would become a model for how not to respond to business model disruption from the online world.

A similar hesitation with regard to the Internet occurred in the framing of the new Communications Bill. The White Paper heralding this legislation was delivered on the stroke of the new millennium, in December 2000, when politicians and the media were more agitated about the ‘millennium bug’ than the emergence of the Internet as an alternative global, commercial platform for distributing creative works, along with other goods and services. 68

Around the same time, Scottish policymakers had identified a somewhat different direction. The publication by Scottish Enterprise in 1998 of Creativity and Enterprise 69 took as its starting point the DCMS and Creative Britain paradigm, but set out a far more digitally driven vision of the creative industries in which the role of the Internet and enabling software were made explicit. This initial work was further developed with the launch in 2000 of a creative industries strategy for Scotland, 70 which saw digital media as the engine of growth and a focus for investment. Subsequently, Scottish Enterprise’s interest and commitment to the creative industries has waxed and waned, suffering from unhelpful tensions between Scottish Enterprise on one side and major cultural organisations (such as the then Scottish Arts Council and Scottish Screen) on the other. The result has been a loss of clear shape in policy. An industry–led 2009 digital media strategy for Scotland, Digital Inspiration, was forthright in its focus upon economic opportunities arising from digital

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technologies, in contrast to the Scottish Government’s current creative industries strategy 71 which makes scant mention of the Internet. It is not easy to identify concrete outcomes from most of this activity.

Northern Ireland came late to the creative industries party, following a stuttering start with early policy statements that did not translate into action. 72 In a Strategic Action Plan for the sector in 2008, 73 the transformative impact of the Internet and digital technologies were still conspicuous by their absence. Northern Ireland has a division of responsibilities for creative industries policy between the Department of Culture, Arts and Leisure (DCAL) and the Department of Enterprise, Trade and Industry (DETI) that mirrors the UK split between the DCMS and Department for Business, Innovation & Skills (BIS) (formerly the DTI). However, DCAL’s ‘lead’ role is not as formally established as that of the DCMS (and a recent inquiry by the Committee for Culture, Arts & Leisure calls on it to raise its profile as policy lead for the sector 74 ).

Wales commissioned a policy review of creative industries in 2004, 75 . which built upon sectoral approaches to the automotive and aerospace industries, but suffered from a serious absence of data about Welsh creative industries. This review focused on film, television and music, with the intention (never realised) of extending to other parts of the creative industries later. At its heart was a £7 million Creative Intellectual Property Fund, stronger business support and more involvement of industry experts in administering policy towards the creative sector. A subsequent review of Wales’ creative industries (led by one of the authors of this manifesto in 2009/10) found the 2004 policy insufficiently attentive towards emerging digital business opportunities across the creative industries generally and “lacking clarity of strategic purpose.” 76 More recently, Wales has developed an investment fund to support digital business growth and continues the search for an effective way to achieve satisfactory broadband and mobile coverage in a sparsely populated, mountainous country.

Meanwhile in the English regions, the early years of Creative Britain saw some Regional Development Agencies (RDAs) take up the baton of policy thinking for the creative industries, supported by landmark initiatives such as the BBC’s move of significant parts of its London–based activities to Salford. Cities such as Bristol and Glasgow were among those that emerged with a reputation for imaginative growth of their creative industries, with a combined focus upon creative businesses, on the one hand, and the subsidised arts on the other. It became routine to identify the creative and digital industries as ‘priority’ sectors in regional and local industrial policies, 77 not always convincingly so. Following the 2010 election, the RDAs were abolished and budgetary pressure on local authorities led to significant retrenchment in cultural projects. Across the UK, there have been spasmodic attempts to nurture creative clusters of one kind or another; in Chapter Six, we critically evaluate the approaches taken.

3. ofcom

In 2003, Ofcom represented an ambitious response to the forces shaping media and telecommunications convergence, 78 with a set of powers intricately connected to the governing EU legal framework in telecommunications, audio–visual media and e– commerce. Some, including powerful news media proprietors, thought the new ‘super– regulator’ had too much power (in the run up to the 2010 General Election, David Cameron proposed radical retrenchment 79 ). Others argued that Ofcom needed an even broader mandate, given the speed at which the Internet was changing the face of the media and telecommunications sectors.

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For example, film–maker (Lord) David Puttnam, argued that “Ofcom should have been given more powers, even investigative ones, in relation to emerging technologies,” 80 but

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as the Bill made its way through Parliament print media companies’ concern to avoid encroachment of broadcast–style ‘over–regulation’ of their own activities converged with the views of Internet free speech campaigners to resist anything that smacked of content regulation on the Internet, unless (according to the compromise eventually reached) the service in question was ‘television–like’.

Telecommunications companies, as Internet Service Providers (ISPs), were chiefly concerned to ensure that the new regulator focused upon incentivising investment in their burgeoning broadband networks. The Communications Managers Association said

a regulatory approach to issues arising from the Internet could wait another decade. 81

These positions reflected legitimate concerns, but they meant that that consideration of the Internet’s rapidly emerging importance as an alternative platform for the delivery of content became something of a side issue.

So, Ofcom formally began its operations in 2004 with no mandate, not even a research– based watching brief, with regard to the Internet. By 2004, it should be recalled, Apple was engaged in its potent re–invention; Amazon was a decade old; Google was planning

its first stock market public offering and Facebook was the new kid on the block. Whilst it

is true that Ofcom’s data gathering and research activities today (with no change in legal

mandate) have not prevented it from paying attention to the impact of the Internet on the UK’s media and telecommunications sectors, 82 even now that work largely has to be justified with reference to legal duties framed in a pre–Internet environment or to concerns arising from Ofcom’s more detailed responsibilities with regard to either broadcasting or telecommunications. For example, the 2012 Ofcom Communications Market Report deals for the first time with the important issue of emerging online ‘hyperlocal news services’; 83 Ofcom justifies this work with reference to its need to deliver competition and plurality assessments of regulated local broadcast media markets.

It is also true, however, that Ofcom had plenty on its plate in 2004. There were complex

spectrum auction and utility regulation challenges arising in telecommunications, which would themselves govern the speed at which the UK could acquire a fit for purpose broadband infrastructure. Commercial television needed a new regulatory framework as UK television went officially ‘digital,’ a process completed only in 2012, by which time the Internet had emerged as a very significant alternative platform for both radio and television, with big implications for Ofcom’s core duties with regard to telecommunications regulation and spectrum licensing. We discuss Ofcom’s role and related competition issues in Chapter Nine.

4. nesta, creativity and innovation

As Ofcom made its way from infancy to adolescence, Creative Britain’s other children were also coming of age. Nesta, with an initial endowment of £200 million, was in business by 1998, meriting seven references in Chris Smith’s Creative Britain publication, where it is variously asked to: “build the bridge between an idea and a product”; “be a National Trust for Talent”; “pull down the artificial barriers between science, technology and the arts”; “turn creativity into products and services which we can exploit in the global market”; and “advance public appreciation of the creative industries, science and technology.”

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It is not surprising that with such a sprawling brief, Nesta suffered some blurring of vision.

In its first decade it chose to assist individual creative entrepreneurs and businesses through enterprise support and mentoring, but it lacked the authority to influence in any decisive way the digital creative economy issues which are the subject of this manifesto. For example, it played no significant role in the debates that dominated Ofcom’s first decade (broadband roll–out and the future of public service television) and it was a bystander in the acrimonious debates about intellectual property which eventually

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overwhelmed the Digital Britain project of 2008 to 2010. Nesta’s authority in creative economy issues, however, has been established in an ambitious research programme in the last decade, providing a renewed opportunity for evidence–based thought leadership following its new role (since 2012) as a free–standing charitable endowment.

But if Nesta’s brief was hazy, the education debate was marked by violent self– contradiction. In 1999, Ken Robinson, then Professor of Education at the University of Warwick, was asked to chair a national committee of inquiry into creative and cultural education. His report, All Our Futures, 84 argued that creativity should be set alongside literacy and numeracy as a strategic priority at all levels of education. Although Robinson’s views have subsequently been in demand all over the world (he is now based in Los Angeles) his own assessment of the UK Government’s response to his work is that it was ‘marginalised’ 85 by a Government in thrall to more basic issues of numeracy and literacy.

In 2006, the Leitch Review of Skills further focused political attention upon numeracy and literacy, maintaining a line of continuity in UK education policy which extends to the current Government’s concern about ‘essential knowledge,’ 86 so ensuring marginalisation for Robinson’s creativity agenda. In 2010, the Government’s attempt to emulate the International Baccalaureate, the English Baccalaureate, excluded Art and Design & Technology. We address the creative economy education debate more fully in Chapter Eleven of this manifesto.

In 2005, Sir George Cox had delivered (to HM Treasury) his report: Creativity in Business:

Building on the UK’s Strengths. This took a very broad view of the growing place of creativity in many business sectors, including manufacturing, and drew particular attention to the creative needs of small and medium–sized enterprises. The Cox Review specifically highlighted the critical role of design in shaping the relationship between creativity and business. yet Cox’s impact upon policy would also prove elusive as UK policymakers fought shy of developing an innovation system designed to harness and respond to creativity. We consider these issues in greater detail in Chapters Five and Six.

It is difficult to avoid the conclusion that in the early years of the new century, the visionary dynamics of Creative Britain were encountering resistance. Education policymakers were not convinced by Robinson’s creativity agenda. Business and innovation policymakers did not act upon Cox. This absence of coherent engagement from relevant parts of Whitehall, including the Treasury, would prove debilitating for policy thinking on the creative economy. Ofcom and Nesta, in their different ways and for different reasons, were not in a position to offer the breadth of thinking needed to help guide the UK’s strategic response to a digital world where the pace of change was becoming more intense, year after year.

Worse still, as the political momentum behind the creative economy dipped or became more cautious in the UK, it was picking up in other parts of the world. South Korea designed and delivered a world–leading digital infrastructure; Singapore executed an ambitious programme of reform of education, then, along with Israel, IP; Canada introduced a series of aggressive tax measures to attract inward investment to its video games, music, film and publishing sectors; China set itself ambitious creative industries and patent generation goals. Brazil, for a period, embraced open source and Creative Commons. Most important of all, Silicon Valley roared into the world of social media, with the launch of Facebook, as other creative business centres thrived in the US, in places as diverse as New york, North Carolina, 87 Boston 88 and Austin, Texas.

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5. creativity plus electronics

In the UK, these international developments lent weight to calls for a more ambitious approach, but the political and business climate had become more difficult, as the creative industries united around the central priority of defending copyright in the disruptive new setting of booming online markets.

As early as 2001, John Howkins, a prolific and influential UK media business consultant, had deployed the term ‘creative economy’ in the title of a book with an airport bookstall proposition: The Creative Economy: How people make money from ideas. Howkins identified intellectual property reform as a key issue and led the group which drafted the Adelphi Charter on Creativity, Innovation and Intellectual Property in 2005, and which sought to jolt the UK from its gridlocked approach to copyright and other IP issues. 89 In the 2007 revision of his book, Howkins declared: “The new economy is creativity plus electronics.” 90

Recognising the need for a government response, in 2005 the Department for Culture, Media and Sport launched its own ‘Creative Economy Programme’, of which arguably the most substantial output was Staying Ahead (2007), a detailed re–assessment of the scale, scope, prospects and policy framework for the UK’s creative economy (and co–authored by one of this manifesto’s authors). 91 Meanwhile, the Chancellor of the Exchequer, in his pre– Budget report in 2006, published the findings of a review of intellectual property issues, led by Andrew Gowers, a former Editor of the Financial Times. 92

The Gowers Review concluded that the UK’s IP system had historically been a source of strength, but in advancing 54 specific propositions for change, Gowers also recognised the case for a substantial overhaul. In particular, Gowers challenged the UK’s creative industries over their relentless campaign for further extensions of copyright protection, supported by ever stronger policing, arguing that current term limits (already extending beyond a century) were already as hard to justify on economic grounds as they were difficult to enforce in the world of global data sharing facilitated by the Internet. (We discuss IP issues in Chapter Ten of this manifesto).

In 2008, another White Paper sought to re–assert a sense of policy coherence, but Innovation Nation had nothing beyond lip service to pay to the creative economy. 93 Its institutional focus was on the Technology Strategy Board, newly chiselled from the Business Department, and very closely tied to a science and technology agenda. With an Intellectual Property Office set up as an administrative rather than a policy–shaping body and Ofcom pre–occupied with a complex regulatory load on issues like competition in the Pay Television market, Creative Britain was running out of steam.

6. Digital Britain

This was one of a number of voids which the Digital Britain project aimed to fill. 94 In June 2007, Gordon Brown had replaced Tony Blair as Leader of the Labour Party and Prime Minister. Stephen Carter, Ofcom’s first Chief Executive, was drafted into Number 10 as the PM’s Chief of Staff, but the new arrangement did not take. Carter moved over to the House of Lords and a new role as Minister for Technology, Communications and Broadcasting in the Business Department. From there he would direct a Digital Britain team drawn mainly from the civil service and Ofcom, but which also co–opted external experts, including Andrew Gowers to guide on intellectual property issues.

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Digital Britain expressed a technocratic ambition, which included the re–invigoration of Creative Britain. It set its sights on “a strategic view of the sector, backed by a programme of action… to support the growth of digital infrastructure… to enable Britain to be a global centre for the creative industries in the digital age”; to ensure that people have the right “skills to flourish in the digital economy and that all can participate in the digital society” (and to improve public services) “through digital procurement and digital delivery.” By the end of 2008, this was presented as a beacon of the new ‘industrial activism’ to which Prime Minister Brown and his newly appointed Business Secretary Lord (Peter) Mandelson, were committed as part of their response to the economic shock caused by the collapse of Lehman Brothers and the resulting financial crisis.

Prime Minister Brown proclaimed on the first page of the resulting report: “Only a Digital Britain can unlock the imagination and creativity that will secure for us and our children the highly skilled jobs of the future. Only a Digital Britain will secure the wonders of an information revolution that could transform every part of our lives. Only a Digital Britain will enable us to demonstrate the vision and dynamism that we have to shape the future.” 95

Beyond this rhetoric, the 60–point summary of conclusions and actions ranged from taxing telephone lines to providing support for investment in Next Generation Broadband through to giving tax breaks for video games developers. The first of 19 Digital Britain propositions also declared that “the Government believes piracy of intellectual property for profit is theft and will be pursued as such through the criminal law”, paving the way for legislation to force ISPs to co–operate with an Ofcom–led regime to identify and punish offenders, if necessary by cutting them off from the Internet. 96

Other recommendations sought to secure the Gowers Review’s copyright reforms around access to orphan works and the development of more fluid, legal markets in licensed digital content; the Technology Strategy Board was instructed to start work on a Next Generation Broadband ‘test bed’ for digital transactions. There were also warm words for the BBC and Channel 4 and some rather innovative thoughts about how to shore up the crumbling base of local news provision in the UK by supporting a network of independently financed, multi–platform news consortia.

But with the election approaching, creative industries lobbyists were at the peak of their capacity to influence. One by one, the three main political parties turned against the proposed Gowers Review copyright reforms and in the process disembowelled that aspect of the project’s reforming intent. In 2009, a junior Business Minister, David Lammy, was asked to turn out a new ‘copyright strategy,’ 97 which confirmed much of the Gowers analysis, but concluded that reform was not needed. 98 As the Government readied itself to push the Digital Economy Bill through Parliament ahead of an election due by May 2010, the press was thick with reports of Government concessions to industry lobbying. 99 Some of the most controversial clauses were dropped and the Digital Economy Act, including its measures to toughen up online enforcement of copyright and allow Ofcom to monitor ISP traffic management practices, hobbled to the statute book. 100

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7. Digital Opportunity: innovation and growth

Prime Minister Brown, of course, lost the election, and less than six months later, Prime Minister Cameron dismayed rights holders by proposing yet another review of intellectual property issues, this one to be focused upon the relationship between IP law and its consequences for innovation and growth. In launching the review, the Prime Minister asked whether the UK needed something more like the American ‘Fair Use’ defence against copyright infringement, which Google had argued to the Gowers Review was a critical factor in explaining its own success. This review (see Chapter Ten) was led by one of the

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authors of this manifesto. It concluded that there was, indeed, a significant growth dividend to be had from a well–evidenced programme of reform, but advised against the embrace of

a US–style Fair Use law. 101

Critics of this latest review have argued that both the Prime Minister’s agenda and the review’s recommendations are too sympathetic to the arguments for IP reform made by Google and other large American digital businesses. The Coalition Government has, nonetheless, acted upon the Hargreaves Review’s findings on IP reform. 102 At the same time, it has opened a public discussion about the contents of a new Communications Bill, which may be needed in some form, if only to update licensing arrangements and to enable UK statute to reflect changes in European law. An open letter published in May 2011 103 anticipated three areas for potential government action:

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Growth, innovation and deregulation “to make the UK communications and media markets more competitive globally”.

A communications infrastructure that provides foundations for growth, delivering “the best superfast broadband network in Europe by 2015, supported by any necessary reform of spectrum allocation arrangements”.

The right environment for the content industries to thrive “in order to achieve the right balance between appropriate protection for the public while enabling rapid innovation, better services and sustaining freedom of expression.” 104 (The language here establishing a place–holder for the Government’s response to the Leveson Inquiry on the culture, practices and ethics of the press, which would be published in November

2012.)

What was most obviously missing from this list? In short, the Internet or, to put the point another way, the ambition to understand the implications for competition and other regulatory issues of rapidly growing digital markets including the role within them of powerful Internet platforms, such as Google, Amazon and Apple.

Today, governments around the world continue to define and refine policies designed to strengthen their creative economies. Europe’s fragmented digital market contrasts with the borderless digital markets of the United States and China. Much can be learned from digital initiatives in places as diverse as Singapore, Estonia and Canada. But the main lesson of this short UK history of the last 15 years is that brisk adaptability to transformative digital technologies is a pre–condition for successful policy design. Policymakers must beware of those forces, such as regulatory capture by powerful established interests, which draw them into paralysis.

It would be wrong, however, to ignore what is going right on the policy front today. The

Government, having established a Creative Industries Council, 105 has embraced the case for copyright reform, along with an agenda to promote greater access to public and open data and a more open model in academic publishing. The Council is also supporting important work to improve statistics and measurement and on skills and access to finance. Nesta’s Next Gen collabaration with Ian Livingstone and Alex Hope has won sufficient support to persuade the Education Secretary to include computer science in the English Baccalaureate. There has been clear digital leadership from a number of important UK institutions, ranging from the Arts and Humanities Research Council and the British Library to the National Theatre and the Open University. The challenge is to shape these initiatives into a coherent and sustainable whole. Our starting point is to go back to basics and ask, as we did in 1997: what is the creative economy?

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3 wHAt Is tHe creAtIve econoMy?

It is easy to understate the importance of clear definitions and reliable economic statistics

to the formation of good policy. yet, without these tools, policymakers risk missing the most important sources of employment and growth; it becomes much harder to maintain

a coherent policy framework, and impossible to track progress. In the UK, the existing

creative industries definitions underemphasise the importance of digital businesses, many of whose business models do not revolve around the exploitation of IP. They also neglect fast–growing creative activities that take place outside of the creative industries in the wider economy.

But defining and measuring the creative economy is not straightforward. 106 Not only does it require data to be consistently gathered over time, but the definitions must also be capable of responding to genuine structural shifts in the composition of the creative economy, such as those stemming from digitisation.

In this chapter we describe how, over time, the definitions and metrics used by DCMS have

become less able to fulfil this essential function. Inadequate statistics have contributed to

a perception in the eyes of some that the creative economy is not a well–defined economic

entity that is susceptible to strategic policy interventions. We recommend a way forward, with a statistically robust new methodology for classifying and measuring the creative economy, based on a detailed study of where creative people work, which evidences what

is distinctive about the creative industries (namely, their specialised use of creative talent),

but also captures the importance of ‘embedded’ creativity in the wider economy.

1. A brief history of creative industries statistics in the uk

In 1998, the UK Department for Culture, Media and Sport famously defined the creative industries as “those industries which have their origin in individual creativity, skill and talent and which have the potential for wealth and job creation through the generation and exploitation of intellectual property.”

Based on this, the DCMS Mapping Documents in 1998 and 2001 proposed that 13 sub– sectors made up the creative industries (as listed in Chapter Two). This seminal work became the template for numerous other national studies throughout the world, in high– performing countries like Taiwan, New Zealand, Australia, Singapore 107 and Germany, 108 and at the regional and city level too, e.g. London, Paris and Auckland. 109

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For the UK, these creative industries appeared to form a reasonably coherent group based upon the generation of commercial value by creative talent. Together they comprised one of very few business sectors (with financial services and aerospace), where the UK could plausibly claim to be a world leader.

Independent research lent support to the view that the DCMS’s sub–sectors were a coherent grouping: they produced most of the UK’s creative products. The official Input– Output tables, which provide detailed information on the supply and use of goods and services in the economy, showed that the creative industries provided as much as 83 per cent of total domestic supply of creative goods and services in 2004. 110

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Labour market statistics further reinforced the view that the creative industries as captured by the DCMS–13 were an economic reality. Analysis of the 2001 UK Household Census and the 2001–2006 Labour Force Surveys showed that the great majority of these sub–sectors were the biggest employers of creative talent. 111

However, the DCMS’s 13 sub–sectors counted amongst them some uncomfortable bedfellows, with a notable split between household–facing sub–sectors like music, film and performing arts and business–facing sectors like advertising, design and software. Software in particular turned out to be controversial because it did not sit easily with the artistic or aesthetic dimension which many believed was the essence of creative industries. 112

There were also a good many caveats and limitations in the DCMS Mapping Documents. These variously concerned overreach, gaps, lack of comparability across sub–sectors (in particular, inconsistencies in data sources and classifications), and insufficient granularity (the reliance on highly aggregated source data). 113

The annual DCMS Creative Industries Economic Estimates, 114 first released in 2002, attempted to address some of these inconsistencies, at least for the sub–sectors which could be identified using the official Standard Industrial Classification (SIC) codes, by producing each year the same headline statistics on Gross Value Added (GVA), employment, net exports and the number of creative businesses, based on consistent data sources for each sub–sector. These headline statistics showed that the UK’s creative industries were growing at twice the rate of other sectors, helping to raise the profile of the creative industries (both in the UK and internationally). 115

yet, a great many challenges remained in the DCMS statistics, as a result of the limitations of the SIC codes, which are set in conjunction with the UN’s industrial classification system for the purposes of international consistency and which are reviewed only at ten–year intervals, and a low level of investment in the statistics by successive governments. 116

Partly because of this (but also because they had different data needs) sector bodies such as UK Music, the (now defunct) UK Film Council, the British Fashion Council and the Crafts Council started producing their own sector–specific economic statistics, along with equivalent bodies across the devolved nations and the English regions. Inconsistent treatments of sectoral boundaries (what should be included and what should not) led to a plethora of non–comparable estimates. The result was an ever–increasing landscape of sectoral, national and regional statistics that purported to measure similar things. 117

To make things worse, in December 2011 the DCMS removed two software–related occupations and industries from its classifications, slicing off in one fell swoop £25.9 billion that the creative industries had previously been estimated to contribute to the UK’s GVA. This unfortunate decision betrayed a lack of appreciation of the interconnected role that software and creative content plays even in non–software businesses, a point we return to below. Meanwhile, a 2012 economic impact study by Creative Scotland argued for the inclusion of software. 118

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Such confusion weakens the standing of the creative industries in the eyes of mainstream UK economic policymakers, and in particular HM Treasury. 119 The work of key agencies like the Office for National Statistics has also remained strangely disconnected from the creative industries, even as BIS and the DCMS promoted the creative industries as a high–growth sector. 120 The UK Government has not played a sufficiently energetic role in international efforts to coordinate the production of internationally comparable statistics, such as UNESCO’s or Eurostat’s ESSnet Cultural Statistics Frameworks. 121

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2. A dynamic mapping of the uk’s creative industries

The DCMS has never published a methodology by which it determines which sub– sectors are deemed ‘creative’ and which are not. Without this, it is no surprise that the way we think about the creative industries in statistical terms has not adapted well to the emergence of entirely new forms of creative business made possible by digital technologies.

In order to address these issues, we have worked with researchers Alan Freeman and Peter Higgs at the Queensland University of Technology to develop a methodology that is explicit about those features which make an industry creative, and then measures those features in order to identify the creative industries. 122 We show that a defining characteristic is their especially intensive use of creative talent.

Our starting assumption is that creative talent is different from other types of labour in that it helps give the organisations that employ it the capacity to offer differentiation in their products; to cater precisely for the discretionary requirements from ever more demanding groups of consumers and business clients. What characterises genuine creativity is not the production of large, standardised volumes at low costs, but what is in effect a continuous succession of smaller runs of products each varying from its predecessors and competitive offerings. These points of differentiation may be small, but they are sufficiently valued by customers to attract their loyalty. This helps explain why bestselling products in markets as diverse as books, music (and, outside the creative industries, pharmaceuticals) are characterised by high and increasing rates of churn. 123 It is creative talent that has enabled these creative businesses, much more so than businesses in other industries, to respond to the needs and desires of their customers and to reach new markets.

Core to our understanding of this creative talent is that it has an appreciation of what ‘kind’ of effect is desired, but it is not told how to produce that effect in the same way that, say, an assembly line worker or many skilled technicians or engineers are instructed. The creativity consists in devising an original way of achieving an effect that is not expressed in precise terms (or in any terms at all in the case of open–ended creativity). 124

This confers an important quality on creative talent, namely that it is difficult, if not impossible, to fully mechanise the creative process and hence to substitute machines or devices for humans. Mere implementation of a creative decision is not in this sense a creative role, but making one is.

Technology has largely done away with the need for the highly skilled roles of typesetters and photo touch–up artists, for example. The former is now subsumed into the page management applications and style guides applied by art directors and graphic designers. The continual process of democratisation of technology lowers the cost and the technical skill needed to do previously highly complex, yet no longer creative, tasks. Creative professionals adopt, adapt and absorb new technologies in pursuit of creative excellence, but they are seldom made wholly redundant by it.

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The product differentiation that characterises the creative industries and their talent is also reflected in their distinctive production processes, described by writers such as Richard Caves. 125 Foremost amongst these are very high levels of flexible collaboration and project– based work 126 (Caves’s ‘motley crew’ property), the existence of pre–market or ‘gatekeeper’ selection mechanisms (galleries, agents, distributors, publishers etc.), contracts that manage uncertainty rather than risk (the ‘nobody knows’ principle) and so on. A final important characteristic is the strong tendency towards geographical clustering at a local level, 127 which we discuss in Chapter Six, leading to phenomena such as Soho’s post– production cluster, East Scotland’s games hub, Brighton’s Fuse and Shoreditch’s Tech City.

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These considerations inform an economic model of the creative industries, with its own characteristic inputs, outputs and production processes. They also give rise to a definition of a ‘creative occupation’ as:

“a role within the creative process that brings cognitive skills to bear to bring about differentiation to yield either novel, or significantly enhanced products whose final form is not fully specified in advance.”

In research undertaken for this manifesto, this definition is used to specify five creativity criteria with which to score all the Standard Occupational Classification (SOC) Codes in the UK workforce. These are:

1. Novel process – does the role most commonly solve a problem or achieve a goal, even one that has been established by others, in novel ways?

2. Mechanisation–resistant – does the role contribute something for which there is no mechanical substitute?

3. Non–repetitiveness or non–uniform function – does the work vary because of the interplay of factors, skills, creative impulse and learning?

4. Creative contribution to the value chain – is the outcome of the occupation novel or creative irrespective of the context in which it is produced?

5. Interpretation, not mere transformation – does the role do more than merely ‘shift’ the service or artefact’s form, place or time?

Of course, each of these five criteria is problematic when considered in isolation, and they do not offer hard and fast rules for determining when an occupation is or is not ‘creative’. There are also deep connections between them: it is unlikely that the activities of someone who is constantly called on to devise new processes, to carry out new transformations and to construct creative interpretations of raw material can easily be mechanised. Nonetheless, occupations which score positively on all or most of the indicators are very likely to function as an economic resource that the creative industries require. 128

Occupational scores are then used to calculate a ‘creative intensity’ for each SIC industrial code. This creative intensity measures the percentage of the workforce in the SIC code that is accounted for by workers in creative occupations. Figure 3.1 presents the distribution of employment (y–axis) across sectors with different levels of creative intensity (x–axis), highlighting whether or not they are classified as ‘creative’ in the DCMS’s current classification.

The first striking thing it shows is how a group of industries (towards the right end of the figure) are distinguished by a markedly higher tendency to employ creative workers than other industries. Secondly, it shows that very large numbers of creatively–occupied workers – the majority in fact – work outside the creative industries (the lighter columns add up to more than the darker columns). Thirdly, it suggests that there are serious misallocations in the current DCMS classifications; this includes a definite group of industries, which DCMS does not treat as creative, but which appear in the range 55–65 per cent as a ‘blip’ in the non–creative distribution (the fourth lighter column from the right), including ‘Computer programming activities’ (62.01) and ‘Computer consultancy activities’ (62.02) – the two SIC codes that DCMS dropped in 2011 – which between them in 2010 accounted for over 400,000 people. 129 ‘Other information technology and computer service activities’ (62.09), with a creative intensity of 36 per cent, employs a further 35,000 people.

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Figure 3.1: Distribution of creative employment by creative intensity of SIC codes, partitioned into DCMS and non–DCMS

Number of

creatively-

occupied

jobs

550,000

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350,000

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0

250,000 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 00-05 05-15 15-25
250,000 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 00-05 05-15 15-25
250,000 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 00-05 05-15 15-25
250,000 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 00-05 05-15 15-25
250,000 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 00-05 05-15 15-25
250,000 200,000 150,000 100,000 50,000 0 1 2 3 4 5 6 7 00-05 05-15 15-25

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Creative Intensity, Per Cent Creative Intensity, Per Cent Creative intensity, per cent

Creative Intensity, Per Cent Creative intensity, per cent DCMS-Creative Non-DCMS-Creative 75-85 85-95 The research

DCMS-Creative

Per Cent Creative intensity, per cent DCMS-Creative Non-DCMS-Creative 75-85 85-95 The research further shows

Non-DCMS-Creative

75-85

85-95

The research further shows that the integrity of the creative industries – the most specialised employers of creative talent – as an economically coherent grouping is in fact badly damaged if software workers are excluded from the list of creative occupations used to generate the estimates of creative intensity. While in that scenario an industry like ‘Computer programming activities’ (62.01) retains its relatively high level of creative intensity, indicating that it is a major employer of non–software creative professionals, others like ‘Manufacture of consumer electronics’ (26.40) – which few would consider a creative industry – now emerge as relatively ‘creative’ on the basis of their creative intensities too. This suggests that it is the combination of workforce creative skills across a spectrum of activities – with software as a core skill – which contributes to the ‘creative industries’ as a coherent grouping of sub–sectors. Or more generally, that digital technologies, and the opportunities they open up for creative activity, tend to complement other non–technology creative skills.

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What these results suggest is that there is a distinctive set of industries – the creative industries – which share a common feature: they are disproportionately significant employers of creative talent. 130 But they also highlight the huge significance of creative

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employment outside the creative industries. In this sense, we both agree and take issue with exceptionalist critiques that creative markets cannot by their nature easily fit into industrial frameworks. 131 The creative economy is indeed complex, socially networked and “to a large extent an outgrowth of the previously non–market economy of cultural public goods and private imagination”. But the results show that they can still be measured, insofar as occupational classifications permit us to track where creative people work, and on that basis a distinctive set of creative industries, set within a broader creative economy, can be clearly identified in the data.

3. digital technologies and creativity

If we think about the shape of the creative industries today, we should not be surprised to find digital technologies at their heart (see Box 3.1). 132 Today, social networks, search engines and other digital platforms help to generate new products and services which rely upon highly creative talent (including the contributions of users). 133 We also know that many ‘digitally native’ companies are deeply integrated into creative industries value chains – another indication that they rightfully belong in the creative industries. 134, 135 We see this at all levels – from production, where digital tools are transforming the creative process, to distribution (with new platforms) and consumption (devices); we explore these issues in more detail in Chapter Four.

The inclusion of these digital creative activities in the frame of the creative economy also challenges the preoccupation of the existing DCMS definitions with businesses that generate and exploit intellectual property (IP). IP is of course central to the value added in many creative industries, but significant elements of the creative industries use (or provide inputs for) business models such as online advertising that do not directly rely on exploitation of IP. 136 In fact, sectors like fashion design and advertising showed long before the digital revolution that creative businesses can in some cases thrive on competitive strategies like first mover advantage in which IP plays less of an obvious role. 137

4. so how big is the creative economy?

The new estimates suggest that in 2010, as many as 59 per cent of creatively–occupied workers in the UK worked outside of the creative industries as we have identified them. 138, 139 Table 3.1 also suggests that 2,495,700 (or 8.7 per cent of the UK labour force) worked in the creative economy (that is, 1,932,400 + 563,300). Of this almost 2.5 million– strong workforce, the creative industries employed 1,357,300 workers (4.7 per cent of the UK workforce). These numbers suggest that in its 2011 Statistical Release, the DCMS understated the size of the creative economy by almost one million employees, of which almost half falls within the creative industries. 140

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Box 3.1: the digital face of the creative industries

One of the authors of this manifesto is involved in an AHRC–funded research project called ‘Brighton Fuse’, which seeks to measure the economic significance of the Creative, Digital and IT Brighton cluster. As part of their work, Fuse researchers have identified over 1,500 creative and digital media businesses in Brighton, and have used these companies’ SIC codes to study the extent to which the current DCMS industrial classifications cover the sector. Only just over one quarter (27.2 per cent) of them are covered by the DCMS’s classification. Reintroducing the two software–related SIC codes that were dropped in December 2011 would alone bring that up to 42.5 per cent. If we also considered 62.09 (‘Other information technology and computer service activities’), which as we pointed out also has a very high creative intensity, the coverage would reach 56.5 per cent of the cluster – twice as big as what is covered by the DCMS classification.

The Fuse team also surveyed around one–third of all digital media companies in Brighton, including detailed questions on the commercial activities of respondents. When we look at the activities of the 60 respondents in the two software–related SIC codes dropped by DCMS, we find video games studios, web designers and developers, social network marketing companies, and digital agencies which combine technology and design capabilities to offer advertising and marketing services, and even BAFTA nominees. Interestingly, 22 per cent of these businesses were started by Arts and Humanities and Design graduates, and 40 per cent see themselves as part of Brighton’s ‘artistic and creative community’ – all of which, to our mind, makes them convincing candidates for inclusion in any meaningful classification of the creative industries.

We have separately looked at a recent list of ‘Top European Start–ups’ compiled by the Daily Telegraph, and explored what are the primary SIC codes for UK companies that appear in their ‘Advertising and Marketing’, ‘Audio and Media’, ‘Gaming and Virtual Worlds’, and ‘Social Networking and Collaboration’ categories – that is, those that many would argue are part of the creative industries. In this case, we find that only three out of the 22 start–ups listed would be captured by the DCMS’s current classification of the creative industries (note that some of these are included in catch all categories like ‘Other Business Support Service Activities not elsewhere classified’; in most cases it is difficult for statisticians to do anything with these businesses until new industrial codes are agreed through the ten–yearly international cycle by which the SIC codes are set).

sources:

AHRC Brighton Fuse project. http://www.brightonfuse.com/

Daily Telegraph Start–Up 100 http://www.telegraph.co.uk/technology/technology–startup100/8428665/

Start–Up–100–the–class–of–2011.html

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Table 3.1: Creative Economy Employment, 2010

 

creative industries

non–creative

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Specialists

Embedded

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occupied jobs

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1,138,400

other jobs

Support

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Non creatively–

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26,178,900

occupied jobs

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All occupations

Working in the creative industries

Working outside the creative industries 27,317,300

Total workforce

28,674,600

1,357,300

source: Bakhshi, Freeman and Higgs (2013), using SIC 2007 and SOC 2000 classifications for consistency with DCMS’s latest published Creative Industries Economic Estimates.

The estimates suggest that the UK’s creative economy workforce grew at over four times the workforce as a whole in the 2004–2010 period. 141 The clear conclusion is that those who have drawn attention to the high growth rates of the UK’s creative economy, in the face of accusations of boosterism, 142 are in fact right.

In value added terms, we further estimate that in 2010 the creative industries accounted for 5.3 per cent of UK GVA (which, together with the 4.7 per cent of the UK workforce, suggests that labour productivity is on average higher in the creative industries than in the rest of the economy). 143

Estimating GVA in the creative economy is less straightforward, as estimates of the GVA contribution of workers in creative occupations (or of any workers in fact) are not published by the ONS. 144 In their absence, we infer an indicative estimate by taking the creative intensities for each four–digit SIC code outside of the creative industries in the economy and multiplying them by the corresponding GVA value for that four–digit SIC code. 145 We sum the resulting numbers to give an estimate of the overall GVA contribution of creative workers outside the creative industries, 146 and then add this back to the 5.3 per cent of GVA contribution of the creative industries to give a creative economy estimate of 9.7 per cent of the economy. 147

5. new definitions

Our analysis of creative employment in different sectors of the economy, and the argument that the creative industries are highly specialised users of creative workers, points to a renewed focus on creative talent in the creative industry definitions. It also supports the view that the UK economy is one where digital technologies have given rise to a new class of businesses that are some of the most creative on this measure and also make use of software talent. Furthermore, we have noted that like advertising and fashion design businesses before them, many of these businesses rely upon business models that do not rely fundamentally upon the exploitation of intellectual property. With all this in mind we propose a modification to the DCMS’s original definition so that it comprises: 148

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“those sectors which specialise in the use of creative talent for commercial purposes”

and an allied definition of the creative economy:

“those economic activities which involve the use of creative talent for commercial purposes”

These definitions have the merit of simplicity and involve only one bottomless item of complexity: the word creativity, the definition of which policymakers and academics will surely debate for the rest of time, but which this chapter has argued can be operationalised for measurement purposes. 149

The dropping of the reference within the creative industries definition to IP may be seen by some as a retreat from commitment to the importance of copyright, patents and trademarks, but that is not so. The IP framework plays a central role in the generation of value added for many creative businesses, and it is essential therefore that such businesses are covered by the metrics. But by overstating the centrality of IP, we risk neglecting other, fast growing creative businesses and distorting our approach to policymaking across the creative economy.

proposAl one

the Government should adopt our proposed new definitions of the creative industries and the wider creative economy. these are simple, robust and recognise the central role of digital technologies.

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4 creAtIve tecHnoloGIes And MArkets

1. our digital present

In the previous chapter, we studied employment patterns to show that digital technologies and creativity work in tandem and that it makes no sense to separate the creative use of digital technologies from other creative work. This chapter sheds further light on this relationship through the prism of the digital innovations that are transforming creative markets. In doing so, we provide a context for assessing in Chapter Five the competitive situation of the UK’s creative economy, and for identifying those areas where UK policymakers should focus if they want to support growth.

Perhaps music provides the starkest illustration of a creative industry that has been disrupted by information and communication technologies. In 1998, when DCMS first defined the creative industries, Cher was at the top of the UK singles chart, and The Corrs dominated albums sales. Music was mostly recorded in expensive studios, reviewed in Smash Hits, the New Musical Express and Melody Maker, promoted on the radio, MTV and Top of the Pops, and sold in the form of shrink–wrapped CDs in HMV, Virgin and a legion of independent stores, to be played on a home stereo system or portable Discman.

Fast forwarding to today, easy–to–use software applications like Audacity and GarageBand are helping millions record and edit music. Audiences discover and spread the word about it through social media, video sites and music blogs. They purchase it in MP3 format in online music stores or stream it from services like Spotify, and listen to it on portable music devices and smart phones that can store hundreds of albums. 2012’s biggest popular music phenomenon was Korean pop star Psy, whose hit Gangnam Style received a billion views on youTube.

To be sure, several major record labels are still in business (although they have gone from six at the beginning of 1998 to half that number now), but their control over the value chain has become less assured, as they have been joined by new Internet players such as Apple, Amazon, Facebook and Google, and smaller entrepreneurial start–ups like SoundCloud and Bandcamp.

While specialist music retailers have all but vanished from the high street, the Internet is bustling with digital services providing legal access to music – over 70 in the UK alone. 150 Many innovative independent record labels are thriving too. The UK’s best–selling artist in 2011, Adele, is signed to XL, an indie stalwart. Beggars Group has doubled its annual gross profit since 1998, and now generates 22 per cent of its digital revenues from streaming through sites like youTube and Vevo. 151 Warp Records has gone from strength to strength, expanding into digital distribution through Warpmart, as well as into film and TV production. No part of the music industry value chain remains untouched by digitisation.

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What is true for music also applies in varying degrees to other creative industries, whether they provide content or services to their customers. Amazon already sells more e–books than paperbacks. Advertisers spend more money online than they do offline. Broadcasters operate digital streaming services that can be accessed on computers, smart phones, tablets and video games consoles. Even industries like fashion, which trade in physical

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goods rather than bits, are being transformed by blogging, along with image–sharing and e–commerce sites like ASOS and Etsy. The advent of affordable 3D printers and digital platforms for the distribution of product blueprints promises to bring the same disruption to product design that we have already seen in music and publishing, disturbing creative sectors like crafts 152 as well as manufacturing value chains.

This rapid change raises important questions: What are the drivers of these digital transformations? Will they continue? What are the sources of value in digital creative markets? We need to make sense of the evolving landscape in order to assess the readiness of the UK’s creative economy to harness new growth opportunities, and the fitness of the policy framework which aims to help it to do so.

In this chapter, we draw on an assessment of market and technology trends that we commissioned from consultants MTM London to inform our work 153 and the academic literature to address these important questions. We begin by examining the technological trajectories driving the evolution of the markets where UK’s creative businesses increasingly compete.

2. technology: layers and trajectories

The information and communication technologies that have so transformed the UK’s creative economy are sometimes described as a ‘stack’, composed of layers – hardware, software, networks and platforms. 154 Hardware is the physical embodiment of these technologies – silicon chips, screens, memory, batteries and input/output devices. Software is the set of instructions that enables hardware to manipulate data to achieve a purpose. Networks are the copper and fibre optic cables and wireless transceivers that machines (and their users) in different locations use to communicate with each other. Platforms combine hardware, software and networks to provide the foundation on which other products or services can be built, bought and sold – the Internet being the most obvious example. 155 Others include the Windows Operating System, Apple’s iTunes and eBay’s PayPal.

Information and communication technologies have in the past experienced a sustained trajectory of improvement underpinned by progress at all levels of this stack:

I. The processing power of hardware has grown apace with Moore’s Law, according to which the number of transistors that can be placed inexpensively on an integrated circuit doubles approximately every two years. It is projected that by 2022, microprocessors in consumer devices will have 50–100 times more processing power than they do today. 156

II. Software development has become more efficient as a consequence of innovations such as: object–oriented programming (which makes the ‘objects’ that compose a software program modular, and thus easier to reuse across products and services); new development methodologies such as ‘agile’ and the ‘lean start–up’ model, and the large volume of software code developed by global communities of volunteer programmers who release it with open source licences allowing anyone to download it freely, use it and improve it. 157

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III. Networks are acquiring users (whose devices are nodes), density (the number of connections between nodes), and capacity (ability to transfer data across those connections). This is true of fixed–line Internet – with the advent of superfast broadband, which is now available to the majority of UK households – as well as mobile broadband which, in its Fourth Generation, is projected to reach speeds of 100 Megabits per Second and more.

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Iv. Platforms are able to benefit from the lower costs and higher performance achievable through innovations that involve combinations of components across the technology stack. Examples of such innovative re–combinations include: Microsoft’s Kinect (integrating a motion sensor device, 3D camera, body tracking and voice recognition software); Apple’s Siri personal assistant; the Raspberry Pi educational single– board computer; and the ‘Thingiverse’ Internet Marketplace for object blueprints reproducible in 3D printers. The Internet of Things that connects ‘intelligent’ devices in networks of automation for activities such as logistics or manufacturing is perhaps the ultimate example of an emerging platform made possible by radical progress in hardware, software and networks. 158

3. the impacts: lower barriers to entry in creative markets

This sustained trajectory of improvement in all layers of the technology stack, and the combinatorial innovations that it has made possible, has lowered the barriers to entry to creative markets.

We see this in all stages of the creative value chain: in the area of content creation, for example, cheap (and in some cases even free) tools like Audacity (for music editing), Unity 3D (for games) and Blender (for animation) have reduced the costs of producing professional quality–grade content; in distribution, a myriad of websites, services and platforms magnify audience reach and marketing opportunities. Collaboration tools and crowdfunding sites have lowered the costs of finding potential partners and funders, even when they are on the other side of the globe. Cloud computing services such as Amazon S3 lower the start–up costs for entrepreneurs who can now scale up their computing capacity as market demand grows, reducing their operating costs by as much as 90 per cent according to venture capitalist Mark Suster. 159

Box 4.1: platform openness

All Internet platforms share one important feature: they provide a foundation to build and deliver, possibly for money, other products or services. Our definition of a

platform emphasises its ‘unfinished’ aspects – that is, the fact that it can be extended – but it does not prescribe what the extension entails, which may be provision of goods or services as with e–commerce sites, applications in the case of Operating Systems, or user–generated content in social networks. Our definition is also agnostic about who does the augmenting – it could be the platform owners, third parties or a

mix of both. The design of this mix, and its governance – in particular how ‘open’ or

‘closed’ a platform is – are central aspects of a platform’s competitive strategy and business model.

Open platforms allow a great deal of access for users, content and application providers, in some cases through open standards that make it easy to develop services, devices and applications which are compatible with them, as well as open application interfaces that facilitate the exchange of data. Closed platforms are more tightly managed by their owners – for example in terms of the technical and administrative requirements for participants to use them.

During the ‘Operating Systems Wars’ of the 1980s and 1990s, the personal computer

(PC) was presented as an open platform because it was easier to target by third party developers of applications, and manufacturers of hardware and peripherals, in contrast to Apple’s Macintosh. Today, we see similar differences between the open

and even uncontrolled App environment for Google’s Android operating system

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and Apple’s carefully curated App Store, and between the open PC games platform (that can be freely targeted by any developer) and the ‘walled gardens’ of video games consoles (that can only be targeted by those who purchase an expensive development kit from the platform owners, and pay them royalties on each sale). Platform openness can also refer to user access – in this respect, Wikipedia is an open access platform, while Encyclopaedia Britannica is a closed one.

There are several trade–offs between openness and closure in Internet platforms – for their owners as well as the suppliers of complementary programs and content. Open platforms are usually associated with more experimentation, innovation and competition because entrepreneurs do not need to get permission from the platform owner to launch a new product or service there. Openness has its downsides though – it can attract malicious developers and users, lead to an excess supply of low quality content (as happened in the ‘video games crash of 1983’, when an avalanche of inferior games for Atari’s openly accessible console led to a collapse in the market) (Boudreau and Hagiu, 2008), and create usability problems that prevent a platform from achieving mass adoption (this has been a perennial barrier for open source platforms like GNU/Linux which are popular with tech savvy users, but not with the mass market).

sources:

Shapiro, C. and Varian, H. (1999) ‘Information Rules; A Strategic Guide to the Network Economy.’ Harvard, MA: Harvard Business School Press; Zittrain, J. (2006) The Generative Internet. Harvard Law Review. ‘119: 1974–2039; Veugelers, R. (2012) ‘New ICT Sectors: Platforms for European Growth?’ Boudreau, K., & Hagiu, A. (2008). Platform rules: Multi-sided platforms as regulators. http://papers.ssrn.com/sol3/papers.

As a result of all this, we have seen a vast increase in the supply of creative goods and services, and also a diversification in the supply base, which now goes beyond ‘for–profit’ businesses and start–ups to also involve countless new forms of small–scale producers, user innovators and user content generators, ‘produsers’ 160 and creative citizens. 161

Amateurs, hobbyists and fans can now, for example, use the Internet to reach hyper local as well as global audiences. 162 youTube users upload nearly an hour of video every

second. 163 There are currently around 60 million sites in blog publishing site Wordpress. 164 And communities of ‘modders’ create thousands of custom levels for video games such as Minecraft and Left For Dead. 165 While the fruits of many of these creative experiments will only be enjoyed by their creator’s friends and family, some represent the beginning of

a career in the creative economy. Or even the path to stardom in cases like singer Justin Bieber, who achieved global recognition on youTube; E.L. James’s 50 Shades of Grey, which started as an online exercise in ‘Fan Fiction’; or Londoner Jamal Edwards, whose youTube channel SB.TV has more than 11 million views, and who was ranked 42 in the Sunday Times young Rich List. 166

Open source communities have for their part developed the GNU/Linux Operating System

at the heart of the Android platform, the Firefox browser and the Apache Server software, which currently powers 60 per cent of the world’s servers. 167 The ‘Maker’ movement

is applying the open source ethos to the design and production of physical goods. 168

More problematically, users have also taken to distributing copyrighted content through filesharing networks, an issue which we consider in Chapter Ten.

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4. Internet platforms and the attention problem

The proliferation of digital content and services that we describe has produced what some refer to as an ‘information overload’ or ‘content glut’, that strains the attention of consumers and users, making it hard for them to find what they are looking for, and for creative businesses to secure an audience or user–base for (or an income from) their work. With the content avalanche also come hazards for users, including the malicious – scams, spam and trolls – as well as purveyors of illegal and shoddy goods and services. 169

The multiplication of web media outlets and the general decrease in audience loyalty towards single sites have, for their part, made it hard for advertisers to measure the effectiveness of traditional campaigns (for all they know, their adverts could be reaching the same individuals as they browse across different sites). 170

In the language of economics, the increase in the supply of information brought about by digital technologies and the Internet has not always lowered the transaction costs for consumers and content suppliers, with advertisers caught in the middle.

Some of the world’s most profitable corporations today are in the business of solving this problem. They have done so by diminishing or removing transaction costs through websites that match consumers to relevant information in innovative ways, whilst simultaneously helping advertisers reach these consumers (thus sometimes described as serving two-sided markets). Google built its search engine atop the hyperlinked pattern of the world wide web, and has used the data it generates to target adverts more accurately. Apple has put in place a seamless, secure and, for many people, beautiful ecosystem of hardware (iDevices and computers) and software (iTunes and the App Store) for the distribution of music and video content and software apps. Valve has done something similar with PC Games through Steam. Amazon and Netflix have used data from consumers’ past behaviours to build powerful recommendation engines. Facebook’s new Graph Search feature promises to make it easy for people to source information from their friends – and provides a market research tool for brands and advertisers at the same time.

There has also been a proliferation of sites matching suppliers and buyers of knowledge and creative services. These generally use a crowdsourcing model where clients (‘seekers’) set ‘challenges’ that they use to find the best suppliers (‘solvers’). We see this in TopCoder, which brings together software programmers and clients, 99 Designs, which does the same for graphic designers, and Poptent with its video content for adverts. 171

All these websites and platforms benefit from network effects. That is, as more participants (users or suppliers) join them, their attractiveness to other participants increases. This creates a virtuous circle. Think of how a popular platform such as the iPhone attracts App developers looking to target large markets, while at the same time the rich catalogue of Apps that these companies offer brings in more consumers. Another important implication of these network effects is that they can result in the opportunity for the abuse of market power. We explore this in more detail in Chapter Nine.

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5. long tails and fat Heads

In principle, an online supplier’s ability to offer a repertoire of content or services is not constrained by storage and logistics as is the case with bricks and mortar stores – compare, say, the 26 million songs on the iTunes Store in 2012 with the catalogue available in any record shop. 172 This is true to an even larger extent in online marketplaces like eBay or Etsy, the e–commerce site for crafts, jewellery and vintage goods which in December 2012 listed 2.36 million items for sale. 173

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The ability of such sites to aggregate consumer demand globally via the Internet also reduces the opportunity costs of stocking ‘niche’ offerings. For example, fans of ‘retro’ adventure games in the vein of ‘Broken Sword’ created by famed UK developer Charles Cecil perhaps amount to a handful in any particular town, and this makes it uneconomical for the local store to sell those games. However, when those fans are aggregated across the world, for example at Apple’s App Store, demand can become very substantial: the iOS version of Broken Sword was in fact downloaded four million times in 2011. 174

All of this means that digital platforms can now offer a ‘long tail’ of niche products which, according to journalist Chris Anderson (who coined the term in 2004), accounts for a large and growing proportion of their sales. 175 A study by US economists using 2008 book sales data from Amazon estimates that niche books accounted for 36.7 per cent of overall revenues and contributed as much as $5 billion to consumer surplus. 176 Anderson further argues that “most successful businesses on the Internet are about aggregating the long tail in one way or another. Google, for instance, makes most of its money off small advertisers (the long tail of advertising), and eBay is mostly tail as well.”

Empirical studies, however, show that the majority of companies ‘living in the long tail’ fail to generate any sales at all. 177 In fact, the long tail has been connected to a decline in demand for productions lacking large (‘triple A’) production and marketing budgets; media consultants Oliver & Ohlbaum Associates refer to this situation as ‘the Sagging Middle.’ 178 Several empirical studies of the distribution of sales in the US home video market, and more recently, video rental and streaming service Netflix, lend support to this view. 179

We also see this situation playing out within Internet platforms in the form of ‘congestion’. Companies in marketplaces such as the Apple App Store have trouble standing out above the crowd. When they do, their innovative ideas are often ‘cloned’ by copycat developers,

a behaviour that has resulted in several lawsuits, and is now being punished by some

companies, including Apple. In games, consumers have started migrating to platforms with

a ‘longer tail’ such as online and mobile games, but mid–tier developers in games consoles

and PCs have suffered. 180 Almost 50 per cent of creative and digital media companies in content sectors like film, TV, music and video games responding to a survey carried out as part of the AHRC’s Brighton Fuse research reported that ‘excessive competition in the market’ is a substantial barrier to growing their business. 181

Meanwhile, the commercial ‘superstars’ in the ‘fat head’ of the creative economy are reaping the benefits from the expanded reach and ability to engage consumers that the Internet affords them. Lady Gaga has almost 30 million followers on Twitter, while J.K. Rowling has ‘Pottermore’, a website to sell digital books directly to her millions of fans. As of May 2012, users of the last instalment of Activision’s blockbusting ‘Call of Duty’ games franchise had collectively logged 1.6 billion hours of online play. Venerable arts and cultural institutions are also using digital technologies to grow their ‘virtual capacity.’ For example, over ten million tickets for high–definition live broadcasts from the New york Metropolitan Opera House have been sold since the series started in 2006. 182

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6. the imperative for business model innovation

The transformations in supply and access brought about by the Internet have also produced a surge of experimentation with business models – that is, in the strategies through which creative businesses seek to generate and capture value, something that starts by being found by audiences.

In that respect, creative businesses are drawing on the Internet’s social infrastructure to implement innovations in marketing – such as ‘viral campaigns’ designed to diffuse rapidly through social networks. The Blair Witch Project, The Dark Knight and Cloverfield have become iconic examples of viral film marketing campaigns. Creative businesses

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are also nurturing loyal user communities that provide feedback, user testing, new ideas and valuable user–generated content. For example, Icelandic games company CCCP has established a democratically elected ‘Council of Stellar Management’ to steer the development of its game EVE Online. 183 In some cases, users are enjoying some of the monetary benefits too. In 2012, youTube generated an income for more than one million of its users, and is actively seeking to increase the professional quality of the content they provide. 184

Creative businesses are also innovating in their pricing strategies, including ‘Freemium’, where a business provides free access to a ‘sampler’ or a ‘no frills’ version of a good or service for consumers who are then given the option of paying for ‘premium’ features (such as ‘virtual items’, extra content, professional features, more storage space and so on). 185 This helps creative businesses overcome the ‘information paradox’ that consumers can only work out their willingness to pay for information products when they’ve consumed them. 186 The ‘metered’ paywalls being adopted by an increasing number of newspapers, where users are only charged after going over a threshold of free articles, are a good example of this. The New york Times, a leader in the adoption of this model, reached 450,000 subscribers in 2012, generating for the first time more revenue from its circulation than via adverts. 187 The Financial Times now has more paying digital subscribers than purchasers of its newsprint editions, 188 but its advertising base still relies disproportionately heavily upon print advertising, whose benefits to advertisers are, at this point, better understood.

Another advantage of Freemium over traditional pricing models is that it can help creative businesses segment consumers depending on how much they are willing to pay, and charge them accordingly, thus avoiding a situation where they ‘leave money on the table.’

Other pricing innovations include: Google’s use of auctions to set the prices of keywords for advertisers; crowdsourcing platforms for services (where the client sets the price and quality for a product, and competing suppliers – say, graphic designers – adjust their costs to deliver it); and even markets for the financing of creative projects such as the successful crowdfunding platform Kickstarter.

The tried and tested ‘razor and razorblades’ approach is also helping creative businesses generate revenues in an environment where the costs of reproducing content are converging towards zero. Such content can in effect be cross–subsidised to drum up demand for a complementary product or service where the seller makes the bulk of their profits. This is what Apple does with iTunes and the App Store (supplying affordable digital content that drive sales of its iDevices), what Amazon does with its Kindle family of portable devices (which are sold cheaply to increase demand for media purchased through Amazon.com), and what TED does with its streamed talks (which increase demand for its live events).

Another feature of the Internet that creative companies, like others, are using to generate revenues is its ability to generate ‘Big Data’ about user characteristics and behaviours. 189 These data are being analysed extensively to optimise prices, evolve products in ways that respond to consumer demand, and target adverts more effectively, for example, through real–time bidding where every visit to a site generates an auction between advertisers competing to serve an advert to a visitor, depending on their attributes. Although this helps address some of the challenges already highlighted for online advertising, it also of course raises significant concerns – and increasingly, heated protests – about the boundaries of user privacy.

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7. f uture prospects

The momentum of the technological trajectories that are shaping the convoluted – even chaotic – landscape we have described in this chapter is unlikely to abate in the years ahead. If anything, it is likely to accelerate. 190

In a situation of uncertainty and market disruption, not even the position of today’s corporate giants is assured. Developments in Internet (and stock) markets over 2012, such as the collapse in the share price of Facebook and Zynga soon after their Initial Public Offerings have been linked to these organisations’ difficulties in migrating to the mobile Internet (what some investors refer to as ‘Web 3.0’). 191 Apple stumbled with the release of its new operating system for its iDevices in 2012. Improvements in the HTML5 standard for accessing rich media content in the browser (instead of Apps), and even the appearance of affordable (and crowdfunded) microconsoles may yet overturn the ascendance of ‘walled garden’ environments over the open Internet as a source of content. 192 And consumer backlash against perceived privacy breaches in social media networks may conceivably increase the appeal of business models that are less reliant on hyper–targeted advertising and Big Data.

Mike Lynch, former CEO of Autonomy, has remarked that only now are we finishing the first phase of the digital revolution. According to him, it will be in the second phase – where computers become better at extracting meaning from data – when ‘everything will change.’ 193 Other entrepreneurs and commentators have their own favourite ‘next big thing’, including Wearable Computing, The Internet of Things, Big Data, Assisted Creativity and the Maker Movement. Opinions about what it will be may diverge, but there is general agreement that there will be one.

This is also consistent with the view of scholars of wider general purpose technologies, such as information and communications technologies and electricity. 194 The economic transformations that such technologies bring about are much more than the technical: they require the “wholesale remaking of infrastructure environments, of business models, and of cultural norms”, 195 all of which take many, many years to become fully embedded.

The picture we have painted leads to one plausible hypothesis, namely that the race for future leadership positions in the global Internet economy is still on. The question is how the UK’s creative economy, which historically has been so strong, can be best positioned to compete in it. The rest of our manifesto looks at what policymakers can do to help.

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5 A polIcy AGendA for tHe creAtIve econoMy

Having provided the context for our manifesto – one of economic opportunity and technological disruption – in this chapter we look at the competitiveness of the UK’s creative economy: how ready is it to harness the growth potential of digital markets? We then propose a framework – we call it the ‘creative innovation system’ – that identifies the resources that feed innovation in the creative economy, as well as its infrastructure and how it is regulated. In the remainder of the report (Chapters Six to Eleven), we examine the state of policy in each of these important areas, and recommend changes which, if enacted, will support innovation and growth in the UK’s creative economy.

1. the competitive position of the uk’s creative economy

In cross–country assessments of digital ‘readiness’, the UK appears in the leading pack in many areas but in others is (in some cases, badly) lagging. 196

What everyone agrees on is the high level of digital sophistication of UK consumers, who are leading the world in their adoption of the Internet for e–commerce and for accessing creative media. They spend more, for example, on Internet shopping than any other major country: in 2011, the average spending per head on e–commerce was £1,083 in the UK, up 14 per cent from 2010, and ahead of Australia and Sweden. 197 In 2011, UK consumers also became the biggest users of mobile data in the world – pushing Japan into second place – and the same is true for consumption of on–demand television content. Smart phones are already mainstream (as many as 58 per cent of the population have one, behind Spain but ahead of the US, France and Germany), and tablet ownership is rising rapidly too. Meanwhile, UK participation in social media networks has grown rapidly, with 10 million active users on Twitter, and over 30 million active users on Facebook. 198

More generally, the UK is one of the largest markets in the world for creative content, goods and services – third in filmed entertainment 199 and video games 200 (after the USA and Japan), fourth in TV content 201 (after USA, Japan and Germany), 202 and fifth in Advertising (after the USA, China, Japan and Germany) 203 to name but a few. A large domestic market benefits UK creative businesses because of the well–known ‘home bias’ in the consumption of creative and cultural content. 204

On the supply side, we also see obvious areas of strength. This is the case for creative content as well as services, where the UK boasts established players with a growing digital presence alongside born digital start–ups who are experimenting with new business models.

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In broadcasting, the BBC is one of the most internationally distinctive (and respected) features of the UK’s creative landscape. Its BBC iPlayer is a digital milestone of recent times, and BBC Worldwide already generates 12 per cent of its revenues digitally. 205 Channel 4 and BSkyB are also known for their innovativeness in the commissioning and distribution of TV (including interactive) content; Sky’s television sports services have played an important part in making English Premier League football a world leader.

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Channel 4’s Future Media division generated 5.6 per cent of the broadcaster’s revenues in 2010, and 8.4 per cent of its operating profits. 206 Then there is the vibrant independent TV production sector, and young start–ups like ChannelFlip Media, which are exploiting substantial opportunities in online video platforms like youTube (where it now boasts around 11.5 million subscribers). 207

There are large global players alongside smaller entrepreneurial companies in other creative sectors too: in advertising there is WPP, but also Albion London, part of the thriving East London cluster of digital creative agencies at the interface between software, advertising, branding, and design. 208 In publishing, we have Pearson (which also owns Penguin 209 ), but also Mendeley, a London–based social network and data storage service for researchers (and acquired by Reed Elsevier for £45 million at the time this manifesto was going to print). The Daily Mail, BBC News and The Guardian attract millions of users to their websites each day (MailOnline has more unique visitors than even The New york Times and has reported excellent progress in building online advertising revenues in 2012 210 ), while Kickstarter–backed start–up Matter funds its investigative science and technology journalism by selling individual stories that can be accessed on any device.

Fashion has Burberry, Topman and ASOS.com (the latter with 7 million members), as well as cutting–edge designers of wearable technology like Studio XO, and Cassette Playa’s augmented reality streetwear. We have already noted the wide range of options on offer for purchasing digital music in the UK, and the recent successes of many independent record labels. In games, while there has been great upheaval for console developers with the closure of studios like Sony Liverpool Studio in 2012 and of Bizarre Creations the year before, social online games studios Jagex and Mind Candy have gone from strength to strength. A recent survey of UK games businesses carried out by TIGA (The Independent Games Association) shows that more than a third of UK games companies are primarily focused on mobile. 211 Oxford–based games publishing and technology company Natural Motion has experienced great success in mobile platforms with its racing game CSR Racing, which it is selling 120 million virtual cars each year. CSR Racing was itself developed by Boss Alien, a spin out from Brighton console studio Black Rock after it was closed by its owner, Disney; this illustrates how the disruption experienced by UK creative sectors can serve to renew their enterpreneurialism. 212

The UK boasts some of the best–known and most respected arts and cultural institutions in the world, like the Tate, V&A, British Museum, Royal Opera House, British Library and the National Theatre, but also experimental collectives like Punchdrunk, No Fit State Circus and Blast Theory. The claim to having launched the world’s first international award in digital art, the Lumen Prize, is made by an organisation based in Cardiff. The award–winning website for New york’s Museum of Modern Art (MOMA) was in fact designed by Cogapp, a Brighton–based user experience and web design agency.

The UK also hosts significant operations from some of the world’s most successful creative corporations, including Google, Microsoft, Facebook, Sony, IDEO and Nike. youTube set up one of its two global ‘Creator Spaces’ to help users produce professional content for its platform in London, while Microsoft has opened Lift London, a games studio that will develop innovative games for tablets.

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What little useful cross–country–consistent trade data there are supports the idea that the UK is a significant global player in the creative industries. 213 As the charts below show, the UK’s market share of exports to 17 other countries ranks highly in the two categories of services for which UK data are available – Audiovisual and Related Services (including Artistic–related Services) and Personal, Recreational and Cultural Services (which, it should be noted, includes some non–creative areas like health and universities). In Audiovisual and Related Services, the UK has a market share of exports of just under 9 per cent, third in the world after the US and Canada, and in Personal, Recreational and Cultural Services, it is in second–place after the US.

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Figure 5.1 Market share and its evolution for Audiovisual and related services, 2002-2010

 

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Change between 2002 and 2010Mexico Brazil Ireland Sweden Market share of exports 2010 Figure 5.2 Market share and its evolution

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The strengths of the UK’s creative economy can be further seen in industry measures of global market share and exports trends. For example, between 2002 and 2011, the UK market share for film almost doubled, from 9.1 per cent to 17.2 per cent. 214 Over that same period, the UK film industry received a sixth of all awards from major academies and film festivals. In the TV industry, the UK is the world’s leading net exporter of formats, and in music, the second source of musical repertoire after the US. 215 Meanwhile, in advertising, the UK’s creative agencies are consistently ranked second in the world, behind the US. 216

2. where are the innovation gaps?

It would be a mistake, however, to assume that all is well with the UK’s creative economy. Even a cursory glance at the exports data we have presented indicates, for example, a decrease in the UK’s market share for the two sectors for which we have data (in the case of Audiovisual and Related Services, the UK’s market share fell by a third between 2002 and 2010).

The UK’s video games industry has slipped from third in international development rankings by retail sales in 2008 to sixth in 2010. 217 Canadian developers have overtaken the UK globally, and also in the UK market. 218 This is even before considering online and mobile platforms where the UK faces stiff competition from other countries like South Korea, Sweden, Finland and Germany.

More generally, if we look at the current landscape, it appears that the UK’s strengths are mostly around the creation and supply of goods, content and services, rather than in their distribution, or the development of platforms and devices such as those that have come to dominate creative industry value chains. Neither do we see UK companies producing the digital tools that are making the creative process more efficient for professionals and users. For example, although the UK is the undisputed European leader in music production, German companies such as Native Instruments and Ableton control the market for digital music–making instruments and have a strong presence in digital music distribution through SoundCloud.

yet, arguably, it is the developers of these tools and platforms that stand to gain most from the commercial opportunities presented by the Internet, as that is where the economies of scale are greatest, not least because of the strong network effects we discussed in Chapter Four. As venture capitalist Tim Chang noted apropos the App economy: “it’s too difficult to predict which developers will make money, so we’re backing the pickaxe suppliers. The guys who made it really rich in the goldrush were Levi Strauss selling jeans etc. – the enablers and suppliers.” 219

There is, then, the risk of repeating past mistakes where UK creative businesses generate great ideas – intellectual properties, genre–defining franchises and bold new concepts – that are then fully exploited by others, only this time on the Internet, with digital platforms replacing analogue publishers as the gatekeepers controlling global markets. Even in the absence of potential abuses of dominant position by Internet platforms such as those that we discuss in Chapter Nine, the UK’s creative companies may find themselves sliding past the ‘sagging middle’ and into a long tail which, the empirical evidence presented in the previous chapter suggests, turns out not to be such a good place to be in terms of commercial advantage.

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Fragmentation and lack of scale is another worrying – and persistent – feature of the UK’s creative economy. As A Future for British Film, Chris Smith’s recent review of British film policy noted when discussing the progress of the UK film industry since the previous review in 1998: “Despite the successes of individual films, the strategic goal of more sustained growth across the sector has not yet been achieved.” 220 Business registry data

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(available at http://www.ons.gov.uk/ons/rel/bus-register/uk-business/2010/index.html) suggests that in sectors like audio–visual (which comprises ‘Motion picture, video and TV production, sound recording and music publishing’), ‘Creative, arts and entertainment’ (which includes live performance and visual arts) and ‘Computer programming and consultancy’, around 90 per cent of companies have fewer than four employees, compared with three–quarters in the economy as a whole.

What’s more, these data understate the importance of small firms in the creative industries, because the business registry and the official surveys based on it do not cover firms that are neither registered for Value Added Tax (VAT) purposes nor run a PAyE scheme for employee income tax and national insurance contributions. 221 Hard data on how many creative businesses this affects are not available but we know from the ONS’s Labour Force Survey that over a quarter of creative practitioners are self–employed, double the proportion for all occupations.

UK creative businesses, mostly small–scale, face the twin dangers of aggregation and fragmentation, with the commercial odds stacked against them on the digital shelves of tightly–controlled walled gardens, or in the wild waters of the open Internet. The best way to confront these risks is through more innovation: in new creative products and services, where the UK traditionally excels; in online business models, so that more of the value added can be captured by UK creative businesses; and in Internet platforms.

The fact that the UK is some way behind its peers in terms of digital infrastructure is a cause for concern in this context. Booz & Company recently put the UK in 12 place in its Digitisation Index, based on the speed, reliability, and ubiquity of the infrastructure, as well as the affordability of access, usability of services, and skills of the population. The UK’s average connection speed, at 5.7 Mbps in the middle of 2012, puts it at 18 th place in the world, and – despite the government’s target of access to 24 Mbps for more than 90 percent of the country by 2015 – the UK is lagging behind several of its peers in the overall rollout of superfast broadband. 222

If infrastructure were the only digital challenge facing the UK creative economy, tackling it might be straightforward, but our analysis suggests that the UK faces significant challenges on a number of fronts: arts policy; research and development; access to finance; arts policy; competition and regulation (including intellectual property); and education and skills. These are the issues that a policy agenda for the creative economy needs to address. Such an agenda must be informed by a ‘system’ view of innovation that identifies the resources, policies and frameworks that need to be in place to support innovation in the UK’s creative economy, setting the scene for our more detailed consideration of policy solutions in the chapters that follow.

3. A creative innovation system

Academic research over the decades has shown that innovation happens within a system that includes the talent that generates, recombines, and experiments with new ideas, the lenders and investors that support these ideas, and the markets where these ideas are tested. 223

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Contrary to laissez–faire accounts, we know that the public sector plays an essential part in this system – in fact, its action (or inaction, or mis–action) has been used to explain persistent differences in the competitive advantage of nations. 224 Schools and universities produce the skilled personnel that generate innovation, along with much of the knowledge that is deployed in it. The fiscal regime establishes incentives for investing in research and development, while competition and intellectual property regulations set the rules of the game within which competition plays out and rewards are distributed. Governments invest

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directly in public goods like infrastructure, and they procure vast quantities of services, as well as scan the horizon to identify promising technologies and set standards that reduce uncertainties about their performance and future evolution. 225

Networks are the glue that bind this innovation system together – ensuring that information about new opportunities, available resources and good practice are rapidly disseminated, helping different agents – entrepreneurs, businesses, investors, policymakers, regulators and educators – to coordinate their activities, and giving voice to smaller players and fragmented industries which, by their nature, are further away from the centres of power and decision–making.

This innovation system must be adaptable. Social systems as diverse as those built around the institutions of intellectual property and measurement have a strong tendency towards stability or inertia: once a particular way of doing things is established, it can become deeply entrenched. 226 If, for example, an industry is too reliant on a declining business model, it is unlikely to be motivated towards cannibalising its own visible shorter–term interest. This is the famous ‘innovators’ dilemma’ that has bedevilled the digital transition of creative sectors such as music, film and publishing to online markets. 227 Compounding the problem, those who might lose from innovation can become vested interests and lobby policymakers to block change and stop innovation in its tracks.

The way in which all these components are configured varies across industries. This has led scholars to focus their attention on specific ‘sectoral systems of innovation’, defined as “a set of products and the set of agents carrying out market and non–market interactions for the creation, production and sale of those products.” 228

The main building blocks of a sectoral innovation system are knowledge and technology, actors and networks and institutions. 229 There is a rich body of research that has examined how these different blocks are configured in the sectoral innovation systems of industries like biotechnology, manufacturing and information technology. 230 There are no such studies looking at the creative economy, but if we are going to understand how to support innovation within it, we need to understand where this innovation takes place. This is what we mean by the ‘creative innovation system.’ 31

In Chapter Three we discussed the essence of creative goods and services (“novel, or significantly enhanced products whose final form is not fully specified in advance of production”), and in Chapter Four we reviewed the trajectories of creative technologies which are manifest in particular industrial structures (characterised by, for example, industrial fragmentation and the presence of gatekeepers). All of these things form components of the creative innovation system. They are joined by the actors, large and small, on the supply side (incumbents and entrepreneurs) and, on the demand side (business clients and consumers).

Here, we focus on the ‘public’ part of the creative innovation system – that which is more closely aligned with policy domains where action can improve (or hinder) the innovative performance of the creative economy, and therefore, its prospects for growth. 232

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What are the practical needs of the creative economy from this innovation system perspective? What does a creative innovation system look like?

It has an education system 233 – including schools as well as universities, colleges and training providers – which supplies talent with the right mix of skills. In the case of the creative economy, this includes the technical and artistic skills to do creative work, but also the commercial and management skills needed to realise commercial value from it. The education system must also produce consumers with an appetite for innovative goods and services.

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It incentivises research and development in the creative industries, just as it does in other sectors through fiscal incentives and funding programmes. Research on IT and software sectoral systems of innovation highlights the importance of basic research which can lead to insights that can then be applied in the private sector. 234 In the creative economy, where innovation often involves the creative deployment of new technologies (not just their production), research in disciplines such as the arts and humanities and social sciences becomes central. 235 Many studies have also highlighted the spatial dimensions of innovation using concepts like industrial clusters and regional innovation systems. 236 These are equally important in the creative economy, with the added consideration of the linkages between not–for–profit arts and cultural institutions, and commercial creative businesses. 237

It is hard to overstate the importance for innovation in the creative economy of risk finance and the institutions that supply it. The literature on innovation in digital sectors like software and internet services has for example linked access to venture capital to the success of these industries in the USA and Israel. 238

The business and technology dynamics that we described in Chapter Four can generate situations of monopoly, and abuse of dominant position. It is the role of the competition regime to keep tabs on the activities of gatekeepers, identify abuses of dominant position where they occur, and act swiftly to remedy them. That requires competition authorities who are well–informed and have the power to act speedily and with the authority when necessary. At the same time, the regulatory system, including competition supervision, should not be so costly that it presents a burden or be so heavy–handed that it penalises business success and stymies innovation.

It has a balanced copyright regime which does not pit rights owners against technology companies and users, and which recognises that monetising content on the Internet and allowing access to the public need not be mutually exclusive.

A unique component of the creative innovation system is the publicly subsidised arts and cultural sector. Public support enables it to take artistic risks that might not be possible in a wholly commercial environment. 239 But partly sheltered as it is from commercial competitive pressures, this sector may need incentives from its funders to undertake digital innovation to maximise audience reach and value. It may further need incentives to promote spillovers between the subsidised arts and the commercial creative economy.

It invests in public digital infrastructure where the market might otherwise under– invest, and procures digital services to support innovative delivery of public services and the more effective functioning of government.

Figure 5.3 attempts to bring together all these insights and maps the UK’s creative innovation system and the main institutions that comprise it. Budget figures are annual aggregates drawn from public sources unless indicated (no attempt has been made to identify separately spend in the creative economy). In the chapters that follow, we assess how well each component of this system is functioning, and then set out, in practical terms, our policy recommendations in each of the key areas that we have identified.

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Figure 5.3 An institutional map of the uk’s creative innovation system Scottish Skills Business HEFCE
Figure 5.3 An institutional map of the uk’s creative innovation system
Scottish
Skills
Business
HEFCE
HEFCE
Funding
EPSRC
Funding
Finance
EIS
ECF
Research
Teaching
Council
£815.8m 7
Agency
Partner.
£260m 31
£92.5m 32
£1.558b 2
£3.213b 40
£1.56b 1
£4.641b 39
£600m 30
HEIF
e-Skills
UK £6.8m 43
£150m 4
Film Tax
VCT
EFG
Credit
Creative
Skillset
R&D Tax
Relief £1.1b 5
AHRC
ESRC
Crafts
£10.3m 41
Creative
Cultural
Skills £3m 42
£150m 33
£379m 35
£131m 34
£106.8m 6
£185.6m 3
Council
£4.4m 12
UK
Skills
SEIS
IIIF
£20m 37
LEPs
£75m 38
Design
£25m 8
Nesta
TSB
Council
£21m 10
£390m 11
£10.7m 9
Mobilising
Finance
Resources
Business
Angel Co-inv,
fund £25m 36
Knowledge
Knowledge
Enterprise
Creation
Selection
BBC
£3.894b 13
Competition
& Regulation
IPO
DCMS
grant in aid
£568.5m 14
£58.3m 27
Channel 4
UKTI
BFI
Creative
OFT
£931.2m 15
£320.4m
16
£104.5m 17
England
£62.1m 26
Funding
£10m 24
and support
Ofcom
ICO
£121.4m 25
£4m 29
Arts
Film
Scottish
Creative
British
S4C
Council
Agency
CC
Arts Council
Scotland
Council
£89.1m 18
Wales
for Wales
£17.2m 28
£52.9m 19
£49.8m 20
£720,4m 23
£35.7m 22
£1.53m 21

references:

1. 2011-2012 (includes teaching and research spend); 2. 2012-2013; 3. Economic and Social Sciences Research Council, 2011-2012; 4. Higher Education Innovation Fund, 2013-2014; 5. 2010-2011; 6. Arts and Humanities Research Council, 2011-2012; 7. Engineering and Phsyical Sciences Research Council 2011-2012; 8. Local Enterprise Partnerships, 2011-2012; 9. 2010-2011; 10. 2011-2012; 11. 2008-2012 (annualised); 12. 2011-2012; 13. 2011-2012;

14.

2010-2011; 15. 2010-2011; 16. 2011-2012; 17. 2011-2012; 18. 2010-2011 (original commissions); 19. 2009-2010;

20.

2011- 2012; 21. Direct expenses 2011-2012. 22. 2011 2012; 23. 2011-2012; 24. Budget for 2013-2014 25. 2012-2013;

26.

Office for Fair Trading, 2011-2012; 27. Intellectual Property Office, 2011-2012; 28. Competition Commission,

2011-2012; 29. Information Commissioner’s Office, 2011-2012; 30. 2012-2014 (annualised); 31. Enterprise Investment Scheme 2010-2011; 32. Enterprise Capital Fund, 2011-2013 (annualised) 33. Venture Capital Trust, 2011-2012;

34. 2007-2012 (annualised) 35. Enterprise Finance Guarantee, (overall government commitment); 36. 2011-2013

(annualised); 37. Seed Enterprise Investment Scheme, 2013 2014; 38. UK Innovation Investment Fund, 2009-2011 (annualised). 39. 2012-2013; 40. 2012-2013. 41. 2011-2012; 42. 2011-2012. 43. 2011-2012.

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proposAl two

policymakers should establish a ‘creative innovation system’ framework within which strategic priorities can be addressed in a coherent and effective manner.

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6 reseArcH And developMent

It is widely recognised that innovation – at its simplest, “new ideas, successfully applied” 240

– is the driver of long–run economic growth. In the UK, it is estimated that innovation

accounted for almost two–thirds of labour productivity growth in the 2000–2008 period, for example. 241

Similarly, a glance at the creative economy’s fastest growing businesses reveals a profusion of innovations. Some of these are technological, like the colossal infrastructure that Facebook uses to manage 500 terabytes of data every day; 242 some are product and service innovations, exemplified by Apple’s iDevices; and others are managerial innovations, such as Valve Corporation’s famous decision to abolish its hierarchies to increase its employees’ productivity. 243 Then there are the ‘softer’ innovations – new stories, universes and characters – which often build on, but sometimes also inspire, these other innovative activities: Double Negative’s ground–breaking visual effects, the interactive iPad app re– curating T. S. Eliot’s poem, The Wasteland , or accompanying Björk’s 2011 Biophilia album; or The Guardian Online’s intricate data visualisations. 244

At one level, these innovations are but artefacts and practices – new products, services, ways of working and making money. At a deeper level, they embody knowledge about what is technically feasible and what customers demand: in short, what works and what does not. Microsoft’s Kinect shows that it is possible to supply consumer electronics with advanced motion–capture capabilities. Avatar indicates the creative and commercial possibilities of 3D film.

1. A techno–centric view of r&d

Research and development (R&D) is an umbrella term for the investments made to create the new knowledge embodied in innovation – including upstream, riskier basic research as well as less open–ended, more applied activities. 245 This knowledge has some features of what economists call ‘public goods’, which means that ‘first to market’ innovators will

generally be unable to capture all the returns from their original investments in R&D. Only

a fraction of the overall revenues generated by the CGI motion picture market accrued to

Pixar, 246 the Californian company that arguably kickstarted this market in its modern guise,

for example. The same is true for the Graphical User Interface (GUI) originally developed by Xerox researchers, and subsequently deployed commercially by Apple and Microsoft. Conversely, late–comers can learn from their predecessors’ failures and avoid repeating the same mistakes. Electronic Arts’ decision in 2012 to change the business model in its much heralded Star Wars: The Old Republic Massive Online Game serves as a costless lesson for other companies thinking about targeting that particular market.

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These knowledge spillovers – uncounted and unrealised by the innovator – mean that overall levels of investment in R&D will tend to be below what would be socially desirable, providing a rationale for government support. yet in practice such support is dominated by a ‘science and technology–centric’ (STEM) view of R&D, despite decades of criticism against such narrowness of vision. 247 In other words, when talking about R&D, policymakers tend to think of people in white coats in the lab, new machines and drugs, which is

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quite different from what R&D usually looks like in the creative economy. There, R&D is more often than not geared towards resolving ‘product’, ‘process’ and ‘business model’ uncertainties involving the novel application of technologies rather than scientific and technological ones per se, even though the application can in some cases lead to further technological innovations. 248 Neither does R&D in the creative economy necessarily entail discrete knowledge breakthroughs that can be captured in patents, or even in academic publications. 249 Add to this the fact that creative R&D activities often happen in an iterative rather than ‘linear’ way, 250 and that they involve sole traders and micro–businesses that, as we noted in Chapter Five, are invisible to official surveys, it should come as no surprise that they can go ‘hidden’ and unsupported. 251

The narrowness of official R&D definitions is not concealed, however; indeed, it is openly declared. It is there in how the Treasury routinely refers to the public research budget as the ‘science’ budget 252 (despite almost £260 million of the £2.5 billion annual budget for the Research Councils being allocated to the arts and humanities and social sciences). 253 And it is apparent in the OECD’s Frascati Manual, which provides international guidelines for R&D definitions and metrics, and describes it as including “creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of knowledge to devise new applications…” HM Revenue & Customs’ (HMRC) notes for prospective claimants for UK R&D tax relief state that all “works in the arts, humanities and social sciences” are excluded from the definition.

An important implication of all this is that the vast majority of innovation policies in the UK have been designed and implemented with sectors such as manufacturing and pharmaceuticals in mind, which rely on scientific R&D processes, making it harder if not impossible for businesses undertaking creative R&D to benefit from them.

We need to refresh our definitions and step up our efforts to measure R&D in all its forms. 254 We also need to make sure that the innovation policies currently in place in the UK – including R&D tax credits, Technology Strategy Board R&D programmes, demand– led innovation policies (including public procurement), university knowledge exchange programmes and local strategies to develop innovative clusters – are all fit for purpose for the creative economy. 255 We look at each of these in turn.

2. r&d tax relief

R&D tax relief is the main mechanism through which the UK government supports R&D in the private sector (currently to the tune of over £1 billion a year). 256 As typically configured, tax relief addresses an important dilemma in innovation policy: how can the state encourage private investment in innovation while avoiding the seemingly impossible task of selecting in advance which innovation projects will be successful and which will fail? It does so by providing tax relief on R&D spending regardless of project outcomes, on the grounds that this spending generates positive knowledge spillovers whether or not a project succeeds. The empirical evidence suggests that R&D tax relief has a stronger effect on R&D spending in some countries (France, Netherlands) than in others (Spain). 257

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The fact that all businesses in the UK can apply for R&D tax relief means that, in principle, there should be little risk that the public sector distorts investment by favouring some sectors over others. 258 In practice, however, the implementation of the scheme, and the way in which ‘eligible’ expenditures that qualify for R&D tax relief are defined, raises barriers for innovators in areas like the creative economy. 259 Put simply, the scheme is less supportive of R&D by creative businesses because it was not designed with their R&D processes and outputs in mind.

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The UK video games industry – with its technologically able workforce 260 and high levels of innovative activity 261 – is a striking case in point. Given the high potential for application of games technologies in many sectors, we would also expect R&D by games businesses to generate significant spillovers into other sectors. Consistent with this, games engines are used for visualisation and training in other industries, and in the ‘gamification’ movement, which deploys games–like mechanisms to encourage desired behaviours in users, such as those that promote health, or improve learning outcomes. 262

However, the video games sector and its R&D activities have distinctive features which, in some cases, prevent it from benefiting from R&D tax relief in the UK. In the first place, innovation in games companies – as in many other creative businesses – is typically organised around collaborative projects which cut across teams rather than in a specialised department in a single corporation. This makes R&D and production entangled rather than sequential, and makes it difficult for developers to account for staff times to prepare R&D tax relief claims in the way that a pharmaceuticals company, say, can account for the time of its research scientists. Furthermore, the success of innovative games technologies, software and designs is determined through testing it with users, however testing activities do not qualify as eligible expenditures for the purposes of the tax relief. 263 Also excluded are the investments in data analytics that help online games companies adapt their products to the needs of users – an increasing problem for intensive users of analytics in other creative sectors like software, advertising and music too. 264

All of these problems are of course exacerbated in the case of the creative industries which are disproportionately made up of small businesses, as discussed in Chapter Five. Smaller firms naturally find it more difficult to engage with the process of applying and securing R&D tax relief. In its 2011 Plan for Growth, the Government announced welcome changes in the R&D tax relief scheme to make it more attractive to SMEs, including an increase in the rate of tax relief for companies with less than 500 employees. 265 HMRC, however, also decided that it did not want to complicate the scheme by adding new qualifying expenditures – which means that the in–built biases against R&D in the creative economy that we have described are still very much a feature of the scheme. 266

3. the technology strategy Board

The UK government also funds R&D directly through the Technology Strategy Board (TSB), its “prime channel for supporting business–led technology innovation.” 267 The TSB spends roughly £300 million each year on science and technology–focused R&D programmes. In contrast to the (at least in theory) industry–agnostic R&D tax relief, the TSB primarily disburses its funds through targeted R&D grants, challenges and networks which seek to ‘connect and catalyse’ different parts of the UK’s innovation system. As an arm’s length body, the TSB can recruit people with the mix of skills it judges necessary to fulfil its remit.

In recent years, the TSB has targeted the creative economy with several initiatives – including a dedicated creative industries knowledge transfer network, 268 challenge prizes through its ICTomorrow programme, 269 various collaborative R&D programmes, and, its newest venture, the ‘Connected Digital Economy Catapult’ (CDEC). 270 In its 2013 Budget, the government committed £15 million to a new TSB–run competition to support digital content production by consortia involving creative businesses, educational research facilities and training providers. 271 Although these investments are far from negligible in size (amounting to more than 200 projects in total, worth £33 million, in the last five years excluding CDEC and the new competition announced in the 2013 Budget), 272 they have lacked visibility and transparency. As a consequence, it is difficult to judge whether they have been effectively targeted, or have achieved their desired impacts.

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In addition to this, the TSB has sometimes faced criticism that its predominant focus on technology–centric R&D (as the organisation’s name clearly indicates) prevents it from truly supporting innovation in the creative economy, which it often appears to treat as a subsidiary of digital, rather than a significant growth sector in its own right.

4. demand–side policies and public procurement for innovation

As by some margin the single largest purchaser of goods and services in the UK, 273 the public sector can in principle engineer a step change in its innovation and growth by using its procurement budget to influence the development of innovative products and services. yet, despite well–intentioned initiatives such as the Technology Strategy Board’s Small Business Research Initiative 274 and a series of design–led challenges run by the Design Council, 275 it is fair to say that the systematic use of public procurement to drive innovation in the UK remains an unfulfilled dream.

Successive reviews have concluded that deep–rooted cultural barriers in government departments lie at the heart of the problem. 276 The current fiscal climate, which leads government departments to prioritise near–term, more certain cost savings over longer term, uncertain service outcomes, reinforces the problem. This manifesto is not the place to revisit these complex issues in any detail, but it is important to note that should the cultural obstacles be overcome, procurement could potentially be a very important driver for innovation in the UK’s creative economy.

This is partly because the UK’s public sector spends the equivalent of around 1 per cent of GDP on information technology. 277 Within this, government departments have traditionally relied on a small number of large systems integrators to provide their digital services. Such contracts have been lucrative for the winning bidders, but out of reach for many SMEs supplying innovative digital services who find procurement procedures excessively bureaucratic. Partly in recognition of this, the Government is introducing a new Digital Procurement Framework, led by the Government Digital Service (GDS), to streamline procedures so that agile SMEs can more easily compete for government contracts. 278 The push across government to open its data is also partly motivated to stimulate the market for innovative digital services by SMEs. 279 While the steps the GDS is taking to reform departmental tendering processes are very welcome, there is a risk that they may not go far enough to make a dent on digital service markets, nor are they sufficiently joined up with other parts of the public sector (including the BBC).

EU public procurement regulations have also been criticised for creating barriers for SMEs that want to tender for government contracts. The most recent update of the EU Public Sector Directive (which should be implemented during 2014) 280 aims to increase participation of SMEs (from all sectors) – for example, by making it harder for EU governments to set disproportionate financial thresholds for tendering that are harder for SMEs to satisfy and also by permitting the establishment of official lists and certification for pre–qualification purposes which reduces the administration burden in tendering for bidders. The Directive also introduces a new ‘innovation partnership procedure’ in line with the EU’s Europe 2020 strategy for smart, sustainable and inclusive growth. 281 The procedure will allow a contractor to propose the development of an ‘innovative product, service or works’ in response to a procurement notice in the Official Journal of the European Union (OJEU) where public tenders are announced.

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As part of our recommendation that government should bring the creative economy into the frame of mainstream R&D policies, the UK should consider how can these changes be leveraged to support innovation in the UK’s creative economy, and to explore the efficacy of leading a campaign in Europe to improve the recognition of the R&D exemptions from the EU public procurement rules as being applicable to the development of digital services, where such services can be shown to be genuine R&D.

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In addition to using its purchasing power to ‘pull’ innovation from its contractors directly, government can also spur demand for innovation by providing incentives for buyers of innovative goods and services elsewhere in the economy (perhaps the best example of this are the so–called ‘innovation vouchers’ used to encourage more interaction between SMEs and universities). Nesta’s previous work has shown how vouchers distributed to SMEs which can be used to buy in the services of innovative creative businesses can also boost innovation in SMEs, at least in the short term. 282 The 2005 Cox Review, which looked at the role of design as a driver of productivity and innovation, made specific recommendations about how this could be done for design, including measures to raise design’s profile with managers by scaling up the Design Council’s Designing Demand programme, and setting up a national network of creativity and innovation centres. 283 Despite the growing body of evidence in the UK and beyond 284 of the important contribution of design as an intangible investment driving economic growth, this agenda has unfortunately languished in the UK in recent years.

5. the public research base and knowledge exchange

The public funding of upstream, basic research in universities is another route, adopted by governments of all persuasions, to address the market failure which results from knowledge spillovers from R&D. The creative economy is no different in this regard. Funding for computer graphics research by the US ARPA (Advanced Research Projects Agency, later renamed DARPA) at the University of Utah famously resulted in the breakthroughs that gave rise to the modern CGI animation and visual effects industries; it also provided the training ground for creative entrepreneurs that would go on to create Pixar, LucasFilm, Silicon Graphics and Adobe. 285 The ‘audioscrobbler’ music recommendation algorithm underpinning online radio Last.FM was developed at the University of Southampton. 286 Basic research in the arts and humanities can also open up new creative and commercial opportunities. It develops the store of cultural heritage, traditions and practices that creative content draws on; it contributes to the public’s engagement with culture and provides professional reflection on it. 287 Thechineseroom, the games studio behind 2012’s indie breakthrough game ‘Dear Esther’ (which sold a quarter of a million copies within half a year of release), originated from a research project on digital storytelling funded by the Arts and Humanities Research Council. 288

In recent years, governments have also introduced funding programmes such as the Higher Education Innovation Fund (HEIF) in England, to incentivise universities to apply their research findings for use in the economy. The research impact goals of today’s funding regime reflects this aim, the latest of many efforts to avoid universities decoupling research from the needs of the private sector and wider society. As part of this ‘impact agenda’, universities in the past decade have been strongly encouraged to package their research outputs as intellectual property (typically, patents) which are then available for commercial licensing. The funding that universities in England receive according to the ‘Sainsbury formula’ measures the success of their external collaborations precisely in these terms. 289

Here we again see the misalignment between a ‘linear model’ of R&D, linked to (somewhat outdated) views of the way innovation happens even in science and technology, and the innovation activities (and knowledge needs) of the creative economy, where patent–based licensing packages are rarely of central importance.

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Geoffrey Crossick, previously Vice–Chancellor of the University of London and Warden of Goldsmiths’, has warned of the dangers of assuming that the types of knowledge that are relevant for the creative economy can be readily codified and transmitted in the form of patents. 290 Instead, he characterises the creative economy as one involving ‘knowledge transfer without widgets’ which includes diverse knowledge modes sitting anywhere along a spectrum with more or less ‘scientific’ (that is, knowledge which is predictive and general) and ‘humanistic’ (knowledge which is interpretive, and intuitive) characteristics. 291

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In many parts of the creative economy, commercial and creative success is linked to the seamless integration of these varied types of knowledge (a theme we revisit in Chapter Eleven in our discussion of education and skills); as the late Steve Jobs said, “it’s in Apple’s DNA that technology alone is not enough — it’s technology married with liberal arts, married with the humanities, that yields us the result that makes our heart sing.”

The dominant organisational model for universities, where research and teaching are conducted within ‘disciplinary silos,’ may hinder this ‘fusion’ of knowledge which is so important for the creative economy. Currently, a number of initiatives are in place to promote cross–disciplinary working, including research programmes that reach across the research funding councils, such as the Global Uncertainties programme, 292 involving all seven UK research funding councils, and the Connected Communities programme, which is led by the AHRC, but supported by the Economic and Social Research Council (ESRC) and the Engineering and Physical Sciences Research Council (EPSRC). The AHRC’s funding of four major knowledge exchange hubs focused upon the creative economy represents another initiative to encourage collaboration between academic disciplines and in their interface with business and other players in the creative economy. 293 There is also a growing focus on multi–disciplinary teaching at postgraduate level in areas that relate to the creative economy. 294 These are welcome moves, but both institutional and funding barriers continue to constrain them, leaving them at the margins compared with more traditional ‘scientific’ inquiry. 295

Crossick’s thesis challenges conventional thinking about how the research base impacts the economy. It also raises difficult questions about the basis for public funding of research in the creative area. If public funding is conventionally justified through the existence of knowledge spillovers, what happens when the knowledge cannot be codified? In what sense is it able to ‘spill over’? Perhaps a more convincing economic argument for public funding of research in these cases would be to incentivise researchers to deploy the skills and competences they have developed through their research experience in other socially valuable contexts – including the private, public and third sectors.

In any case, there is some evidence that many arts and humanities researchers are heavily engaged with the creative economy, but often ‘below the radar’ and in ways which are not well captured by conventional metrics of knowledge exchange. For example, while they are less likely to have taken out a patent, licensed research outputs, formed a business or a spin–out or consultancy than academics in other disciplines, a greater proportion of those working in creative arts and media have had their research applied in a commercial context (25 per cent compared with 20 per cent in non–arts and humanities disciplines). Some 61 per cent of arts and humanities academics interact with other organisations through membership of networks, 55 per cent provide informal advice, and 37 per cent provide consultancy services. 296 This is in line with the interactive view of knowledge transfer in the creative economy advocated by Geoffrey Crossick, where knowledge is “constituted as a social phenomenon… It is given form in social interactions within the value chains that go outside the academic world”. 297

Notwithstanding these connections, however, the systems and processes of major research universities are not always well suited to dealing with the SMEs which populate the creative economy. Their time horizons may be very different, and their key personnel may not be familiar with university bureaucracies. Their relationships with university research programmes are bound to be different from the situation in science and engineering, where laboratory– or ‘testbed’–based researchers move across the boundaries of business and academia, from lab to lab, with relative ease. The experience gained over the last five years by creative economy ‘labs’, such as the Bristol Pervasive Media Studio, 298 a partnership between the University of West of England, Bristol University and the Watershed arts centre, is generating useful evidence and experience for addressing this challenge.

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